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REPORT 

ON 

SALE OF GOODS 



ONTARIO LAW REFORM COMMISSION 




Ontario 






VOLUME I 



Ministry of the 1979 

Attorney 

General 



Digitized by the Internet Archive 

in 2011 with funding from 

Osgoode Hall Law School and Law Commission of Ontario 



http://www.archive.org/details/reportonsaleofgo01onta 



REPORT 

ON 

SALE OF GOODS 



ONTARIO LAW REFORM COMMISSION 



VOLUME I 




Ministry of the 

Attorney 

General 



The Ontario Law Reform Commission was established by section 1 
of The Ontario Law Reform Commission Act to further the reform of the 
law, legal procedures and legal institutions. The Commissioners are: 

Derek Mendes da Costa, q.c, ll.b., ll.m., s.j.d., Chairman 

Honourable George A. Gale, c.c, q.c, ll.d. 

Honourable Richard A. Bell, p.c, q.c. 

W. Gibson Gray, q.c. 

Honourable James C. McRuer, o.c., ll.d., d.c.l. 

William R. Poole, q.c. 

M. Patricia Richardson, M.A., LL.B., is Counsel to the Commission. 
The Secretary of the Commission is Miss A. F. Chute, and its offices are 
located on the Sixteenth Floor at 1 8 King Street East, Toronto, Ontario, 
Canada. 



TABLE OF CONTENTS 

VOLUME I 

Page 

List of Frequently Cited Sources and Abbreviations xix 

Letter of Transmittal xxi 

PARTI 

INTRODUCTION 

Chapter 1 Origin of Project, Organization and 

Methodology 3 

Chapter 2 Evolution of Modern Sales Law 7 

1. The Anglo-Canadian Position 7 

2. Post-1893 Developments 8 

3. The Quebec Position 11 

4. American Sales Law 12 

(a) The Pre-Code Position 12 

(b) The Origins of the Uniform Commercial Code 13 

(c) The Structure of the Uniform Commercial Code 

and Some General Considerations 14 

(d) Article 2 16 

(e) Uniform Land Transactions Act 18 

5. International Developments 19 

(a) The Hague Conventions of 1964 19 

(b) UNCITRAL 21 

(c) UNIDROIT 22 

(d) The International Chamber of Commerce 22 

(e) United Nations Economic Commission for Europe .... 22 

Chapter 3 The Need for a Revised Sale of Goods Act: its 

Form and Related Questions 23 

1. The Lawyer's View 23 

2. Businessmen's Attitudes 25 

3. What Kind of Revised Act? 26 

4. Aids to Interpreting the Revised Act 29 

tin] 



IV 

Page 

5. Retaining Uniformity With the Common Law Provinces .. 30 

6. Greater Harmonization Between the Laws of Ontario 

and Quebec 30 

7. Should Ontario Adopt a Commercial Code Along the 
American Model? 31 

8. A Law of Contract Amendment Act 32 

Recommendations 32 

PART II 

Chapter 4 Scope of the Sale of Goods Act and Definition 

of Sale 37 

1. Introduction 37 

2. The Character of the Parties to the Agreement 38 

3. The Character of the Agreement 40 

(a) Meaning of "General Property" 40 

(b) Sale Incidents in Conditional Sale Agreements 43 

(c) Sale of a Part Interest 44 

(d) Contracts of Sale and Contracts for Work and 

Materials 45 

(e) Agency Contracts for Sale, Consignment Contracts, 

and Contracts of Sale or Return 48 

(f ) Contracts of Bailment, Equipment Leases and 
Hire-Purchase Agreements 49 

4. The Meaning of "Goods" 53 

(a) "All Chattels Personal" 53 

(b) "Specially Manufactured Goods" ...: 54 

(c) "Things in Action" 54 

(d) "Money" 55 

(e) "Unborn Young of Animals" 55 

(f) Goods and Land 57 

(i) Anglo-Canadian Position 57 

(ii) The Code Provisions 60 

(iii) Conclusions 63 

(g) Recommended Definition of "Goods" 64 

5. The Price 65 



Page 

6. Near Sales — Integration or Analogy? 65 

Recommendations 68 

PART III 

Chapter 5 Formation, Form and Assignment of Contract .. 75 

1. Introduction 75 

2. Capacity to Contract and Contracts for Necessaries 76 

3. Offer and Acceptance 76 

(a) UCC 2-206: Acceptance by Performance 76 

(b) The Battle of the Forms 81 

(c) Sales by Auction 86 

4. Consideration 90 

(a) Firm Offers 91 

(b) Contractual Modifications 96 

(i) The Existing Position 96 

(ii) Proposals for Change 99 

(c) Should the Effect of Seals be Abolished? 102 

5. Mistake 103 

(a) Res Extincta 103 

(b) Mistakes of Identity 106 

(c) Wider Proposals for Reform 106 

6. Formalities of Formation (Statute of Frauds 

Requirements ) 1 07 

(a) Introduction 107 

(b) Some Empirical Data 108 

(c) Abolition Versus Modification: UCC 2-201 110 

7. The Parol Evidence Rule 110 

(a) The Problem 110 

(b) Alternative Solutions 114 

(c) Conclusion 115 

(d) Consequential Issues 116 

8. Course of Performance and Construction of Agreement .. 117 

9. Assignment of Rights and Delegation of Performance .... 119 
(a) The Formalities of Assignment 120 



VI 

Page 

(b) The Scope of The Personal Property Security Act .... 121 

(c) The Status of 'No Assignment' Clauses 121 

(d) Modification of Contractual Rights after Assignment 124 

(e) Other Aspects of UCC 2-210 125 

10. Privity of Contract and Contracts for the Benefit of 

Third Parties 128 

Recommendations 128 



PART IV 

GENERAL OBLIGATIONS AND CONSTRUCTION 
OF THE CONTRACT 

Introduction 133 



Chapter 6 Definition of Express Warranty and 

Classification of Contractual Obligations 135 

A. Definition of Express Warranty 135 

1. Recapitulation 135 

2. Definitional Issues 137 

(a) Character of Representor 137 

(b) Types of Representation 138 

(c) Time of Representation 138 

(d) Deemed Adoption of Representation by Others .. 138 

(e) The Reliance Factor 139 

(f) Negligence as a Material Factor 139 

(g) Language of Commendation 140 

(h) Measure of Damages for Breach of a Non- 
Promissory Warranty 140 

(i) Should the Expanded Definition of Warranty be 

Applied to other Types of Contract? 141 

(j) Conclusion: Draft Provision 141 

3. Other Issues 142 

B. Classification of Contractual Obligations 145 

Recommendations 150 



Vll 

Page 

Chapter 7 Freedom of Contract and Minimum Behavioural 
Standards: The Doctrines of Unconscionability 
and Good Faith in Performance and 

Enforcement 153 

A. The Doctrine of Unconscionability 153 

1. The General Issue 153 

2. Specific Questions 156 

(a) Should the Doctrine be Confined to Consumer 

Sales? 156 

(b) Should the Doctrine be Restricted to Cases 

of Procedural Unconscionability? 157 

(c) Should There be a List of Criteria to Guide 

the Court in Its Determination of the Issue? 157 

(d) Should the Court be Able to Raise the Issue 

of Unconscionability of Its Own Accord? 159 

(e) What Types of Relief? 159 

(f) Disclaimer of Unconscionability Defences 160 

3. Legislative Proposal 160 

4. A Cautionary Note 162 

B. Good Faith in Performance and Enforcement 163 

1. Introduction 163 

2. Code Provisions 164 

3. Second Restatement on Contracts 166 

4. Conclusions 166 

5. Good Faith in Bargaining 169 

Recommendations 169 

Chapter 8 Course of Dealing and Usage of Trade, and 

Some Specific Constructional Issues 173 

1. Course of Dealing and Usage of Trade 173 

(a) Course of Dealing 173 

(b) Usage of Trade 174 

(i) Universal Acceptance 175 

(ii) Certainty 175 

(hi) Reasonableness 176 

(iv) Inconsistency 176 



Vlll 

Page 

(c) Conclusion 177 

2. Uncertainty of Terms 177 

(a) General Considerations 177 

(b) Uncertainty as to Price 178 

(c) Output, Requirements, and Exclusive Dealings 

Contracts 181 

(i) Output and Requirements Contracts 181 

(ii) Exclusive Dealings Contracts 184 

(d) Contracts of Indeterminate Duration 185 

(e) Options and Cooperation Respecting Performance .... 188 
Recommendations 190 

Chapter 9 The Seller's Implied Warranties (Conditions) 
of Title, Description and Quality and The 

Effectiveness of Disclaimer Clauses 193 

1. Title, Quiet Possession, and Freedom from Encumbrances 193 

(a) The Implied Condition of Title: Section 13(a) 195 

(b ) Implied Warranty of Quiet Possession 196 

(c) Implied Warranty of Freedom from Encumbrances .... 197 

(d) Implied Warranty of Absence of Infringements 198 

(e) Seller's Right to Cure Defective Title and Buyer's 
Right to Recover Payments on Rescission for 

Breach of Warranty of Title 199 

(f) Disclaimer of Title Obligations Implied by 

Section 13 199 

2. The Implied Condition of Description 201 

(a) Anomaly and Retention 202 

(b) Sales in Self-Service Stores 203 

(c) Seller's Liability for Description of Goods by 

Third Party 204 

3. The Implied Conditions of Quality and Fitness 206 

(a) General Considerations 206 

(b) The Implied Condition of Merchantability 208 

(i) Sale "By Description" 208 

(ii) Character of Seller 209 

(iii) Sales by an Agent 209 

(iv) Meaning of "Merchantable Quality" 210 



IX 

Page 

(1) General Considerations 210 

(2) "Purpose or Purposes" 214 

(3) Used Goods 214 

(4) Durability 215 

(5) Spare Parts and Repair Facilities 216 

(6) Other Specifications of Merchantability .... 217 
(v) Effect of Buyer's Examination 218 

(vi) Conclusion: Draft Provision 219 

(c) The Implied Condition of Fitness 220 

4. Sale by Sample 222 

5. Implied Warranties in a Lease of Goods 223 

6. Cumulation and Conflict of Express and Implied 

Warranties 226 

7. Regulation of Disclaimer Clauses 227 

(a) A General Approach 227 

(b) Specific Issues 230 

(i) Construction of Terms that Limit or Negate 

Express Warranties 230 

(ii) Guidelines Concerning Exclusion or 
Modification of Implied Warranties: 

UCC 2-316 231 

(iii) Disclaimer Clauses Deemed Prima Facie 

Unconscionable 232 

(iv) Disclaimer Clauses in Non-Privity Cases 234 

(v) Deemed Adoption of Disclaimer Clauses 

by Retailer 235 

Recommendations 237 

Chapter 10 Express and Implied Warranties and The 

Doctrine of Privity 243 

1. The General Issue 243 

2. Our Own Position 247 

3. Draft Provision and Consequential Issues 248 

(a) Types of Seller 250 

(b) Types of Subsequent Buyer and Members of 

Buyer's Household 250 

(c) Types of Product 250 

(d) Types of Warranties 251 

(e) Buyer's Remedies for Breach of Warranty 252 

(f) Types of Injury 252 

(g) Restrictions Binding on the Buyer 253 

(h) Other Consequential Issues 255 



X 

Page 
PART V 
TRANSFER OF PROPERTY (TITLE) IN GOODS 

Introduction 257 

Chapter 11 Transfer of Title and Its Incidents Between 

Seller and Buyer 259 

1 . Defects in Existing Law 259 

2. The Code Approach 262 

(a) Special Property and Insurable Interest 263 

(b) Buyer's Right to Goods on Seller's Insolvency 265 

(c) Risk of Loss 265 

(i) General Observations 265 

(ii) Issues Arising out of Section 2-509 and 

Related Questions 269 

(1) Shipment Contracts 269 

(2) Meaning of "Bailee" 271 

(3) UCC 2-509(3) 271 

( 4 ) Duties as Bailee of Goods 272 

(5) Deterioration of Goods in Transit 273 

(d) Risk of Loss — Effect of Party's Breach 

(UCC 2-510) 273 

(i) Delivery of Non-Conforming Goods 274 

(ii) UCC 2-510(2) 274 

(iii) UCC 2-510(3) 275 

(iv) Conclusion 275 

(e) Action for the Price 275 

(f) Sales on Approval and Contracts of Sale or Return 276 

(g) Entitlement to Sue for Tort Damages 276 

(h) Residual Title Provision 278 

Recommendations 280 

VOLUME II 

Chapter 12 The 'Nemo Dat' Doctrine and Sale 

Transactions 283 

1. Introduction 283 

2. The Nemo Dat Doctrine: Removing Existing Anomalies 

and Uncertainties 285 

(a) Sales Under a Voidable Title 285 

(b) Seller or Buyer in Possession 288 

(i) Technical Questions 289 



XI 

Page 

(1) Status of Person in Possession 289 

(2) The Doctrine of Constructive Notice and 
the Effect of Registration of the Sale 
Agreement 290 

(3) Newtons of Wembley v. Williams 291 

(4) Brandon v. Leckie 293 

(5) The Meaning of "Sale, Pledge, or 

Other Disposition" 293 

(6) Sales on Approval and Contracts of Sale 

or Return 294 

(7) Documents of Title 295 

(ii) The Broader Questions of Principle 296 

(c) Entrusted Goods and Sales in Ordinary Course: 
The Factors Act, Section 2; The Conditional Sales 
Act, Section 2(3) (Now Repealed); and, The 

Personal Property Security Act, Section 30(1) 298 

(d) Registration Requirements, Grace Periods, and 
Temporarily Perfected Security Interests 301 

(e) The Bills of Sale Act 302 

(f) Some Tentative Conclusions 305 

3. Should Ontario Adopt a General Possession Vaut Titre 

Rule? 306 

(a) The Civil Law Position 306 

(b) Arguments For and Against the Adoption of the 
Possession Vaut Titre Rule in Ontario 307 

4. Rejection of Possession Vaut Titre; Affirmation of 

Nemo Dat 308 

(a) Sales Under a Voidable Title 309 

(b) Should Section 25 of The Sale of Goods Act 

be Repealed? 309 

(c) Should Owners of Goods be Subject to a Duty of 
Reasonable Care with Respect to Their Entrustment? 310 

(d) Entrustment of Goods to a Merchant, or Adoption 
of a General Market Overt Rule with Respect to 

Sales Made at Retail Premises 311 

(e) Residual Questions 313 

Recommendations 316 

Chapter 13 Documents of Title 319 

1 . The Need for Comprehensive Codification 319 

2. Definition of "Document of Title" 322 

3. Basic Issues in the Sales Context 324 

(a) The Passing of Property 324 



Xll 

Page 

(b) Risk of Loss 325 

(c) Documents of Title and the Seller's Delivery 
Obligations 326 

(i) Goods Held by a Bailee That Are Not to be 

Shipped 326 

(ii) Goods Authorized or Required to be Shipped ... 327 

(d) The Unpaid Seller's Right to Withhold and Stop 

Delivery 327 

(i) As Against the Buyer 327 

(ii) As Against Third Parties 328 

(e) Transfer of Title and Good Faith Buyers 328 

Recommendations 329 

Chapter 14 Delivery and Payment 331 

A. Delivery 331 

1 . Introduction 331 

2. Time of Delivery 333 

3. Place and Form of Delivery 335 

(a) Sales Not Involving Shipment 335 

(i) Delivery at Seller's Place of Business or 

Residence 335 

(ii) Delivery of Goods in Possession of Another 336 

(b) Sales Involving Shipment 338 

(c) Character and Effect of Seller's Reservation of 

Right of Disposal 341 

4. The Use of Mercantile Terms 346 

(a) Which Model? 347 

(b) Impact of Containerization 348 

B. Buyer's Obligation to Pay 350 

1. Time of Payment 350 

2. Payment Before Inspection 352 

3. Sufficiency and Form of Payment 354 

4. Place of Payment 355 

5. Letters of Credit 355 

6. Rights of Financing Agency 358 

Recommendations 361 

Chapter 15 Frustration In Contracts of Sale 365 

1. Introduction 365 

2. The Sale of Goods Act, Section 8 365 

3. Uniform Sales Act, Section 8 369 



Xlll 

Page 

4. Code Provisions 369 

(a) UCC 2-613 370 

(b) UCC 2-614 373 

(c) UCC 2-615 374 

(d) UCC 2-615(c) and 2-616 379 

5. Effects of Frustration and The Frustrated Contracts 

Act 381 

Recommendations 382 

PART VI 

SELLER'S AND BUYER'S REMEDIES 
FOR BREACH OF CONTRACT 

Introduction 387 

Chapter 16 Seller's Remedies 389 

1. Index of Seller's Remedies and Characterization of 

Buyer's Breach 389 

2. Real Remedies 394 

(a) The Existing Law 395 

(i) The Relevance of Title 395 

(ii) Lien Right (Right of Retention) 396 

(1) Seller in Possession as Agent 397 

(2) Part Delivery 397 

(3) Effect of Judgment on Lien 398 

(4) Non-Possessory Lien Rights Where 

Buyer Insolvent; UCC 2-702 398 

(5) Should the Seller's Lien Right Cover 
Damages or Expenses as well as the 

Unpaid Price? 399 

(iii) Right of Stoppage In Transitu 400 

(iv) Right of Resale 401 

(v) Residual Questions 403 

(b) The Code Position 404 

(i) The Right to Withhold Delivery 404 

(ii) Stoppage In Transitu 405 

(iii) Right of Resale 408 

(1) Buyer's Right to Cure 411 

(2) Notice of Resale 412 

(3) Buyer's Entitlement to Surplus Proceeds ... 413 



XIV 

Page 

3. Personal Remedies 414 

(a) Action for the Price 415 

(b) Damages 418 

(c) Penalty Clauses and Forfeiture of Monies Paid 423 

(i) Penalty Clauses 423 

(ii) Forfeiture of Monies Paid 425 

4. Lessor's Remedies for Breach of Lease Agreement 426 

Recommendations 427 

Chapter 17 Buyer's Remedies 433 

A. Index of Buyer's Remedies and Characterization 

of Seller's Breaches 433 

B. Specific Performance and Other Forms of Specific 

Relief 436 

1. Section 50 of The Sale of Goods Act 436 

2. The Uniform Commercial Code Provisions 440 

3. Conclusions 443 

C. Rejection, Acceptance and Cure 444 

1. General Considerations 444 

(a) The Anglo-Canadian Position 444 

(i) Limitations on the Right to Reject 445 

( 1 ) Acceptance of the Whole or Part of 
a Non-Severable Consignment and 

Sale of Specific Goods: s. 12(3) 446 

(aa) Acceptance of Goods in a Non- 
Severable Contract 446 

(bb) Acceptance of Part of a Non- 
Severable Consignment 446 

(cc) Sale of Specific Goods 448 

(2) The De Minimis Rule 449 

(3) Some Miscellaneous Restrictions 

on the Right to Reject 449 

(ii) Acceptance of the Goods 450 

(b) The American Position 451 

(c) The ULIS and UNC1TRAL Approaches 456 

(i) ULIS 456 

(ii) Draft UNCITRAL Convention 458 



XV 

Page 

(d) Conclusions with Respect to Rights of 

Rejection and Cure 459 

(i) Right of Rejection 459 

(ii) Seller's Right to Cure and Buyer's 

Right to Demand Cure 461 

(1) Seller's Right to Cure 461 

(aa) When Does the Right to 

Cure Arise? 463 

(bb) Nature of Non-Conformity 464 

(cc) Nature of "Cure" 464 

(dd) Status of Buyer's Obligations .... 465 

(2) Buyer's Right to Demand Cure 465 

2. Further Consideration of Examination, Acceptance 

and Revocation of Acceptance 467 

(a) Place of Examination 467 

(b) Acceptance of Goods 469 

(c) Revocation of Acceptance 472 

3. Some Consequential Problems Following the Exercise 
of Rejection Rights; and Buyer's Duty to Give Notice 

of Breach After Acceptance 475 

(a) Buyer's Powers and Obligations with 

Respect to Goods 475 

(b) Duty to State Grounds of Rejection and 
Comparison with Buyer's Duties to Give 

Notice of Breach or Suit by Third Party 477 

(i) Duty to State Grounds of Rejection 478 

(ii) Comparison with Buyer's Duties to Give 
Notice of Breach After Acceptance, or to 
Give Notice of Suit by Third Party 479 

(c) Buyer's Lien Rights 482 

(d) To What Extent Do the Code Provisions 

Apply to Wrongfully Rejected Goods? 483 

D. The Buyer's Claim for Damages 484 

1. General Principles of Liability — Has the 

Pendulum Swung too Far? 484 

2. Damage Claims in Private Sales 489 

3. The Computation of Damages Under the Rules 
in Hadley v. Baxendale: Some Particular 

Problems 491 



XVI 

Page 

(a) The Foreseeability Test 491 

(b) Comparison with Article 2 Provisions 494 

(c) The Right to Cover 498 

(d) Sub-contracts, the Foreseeability Tests, 

and Mitigation Principles 499 

(e) Impecuniosity 502 

(f) Goods for Use: the "Rema" Problem 503 

E. Restitutionary Remedies 504 

Recommendations 509 

Chapter 18 Issues Common To Seller's and 

Buyer's Remedies 517 

1. Meaning of "Substantial Breach" 517 

(a) Terminology 517 

(b) Definition 518 

(c) Single or Multiple Tests? 519 

(d) Repudiation and Breach 520 

2. The Market Price Test 521 

(a) Measure of Damages: "Available Market" or 
"Commercially Reasonable Purchase or Disposition" 521 

(b) The Place for Determination of Commercially 
Reasonable Price 524 

(c) The Time for Determination of Commercially 
Reasonable Price 525 

(d) Conclusions 527 

3. Assurance of Performance 528 

4. Anticipatory Repudiation 532 

(a) Comparison of Anglo-Canadian and American 

Positions 532 

(b) Conclusions 535 

(i) Meaning of Repudiation 535 

(ii) Meaning of UCC 2-6 10 (a) 536 

(iii) Effect of Urging Retraction: UCC 2-610(b) ... 537 
(iv) Avoidance of Unjustifiable Expenditures and 

Duty to Mitigate 538 

(v) Measurement of Damages 539 

5. Instalment Contracts 541 

(a) Meaning of "Instalment Contract" 541 

(b) Breach of Instalment Contract by Seller 547 

(i) Effect of Breach as to Instalment Upon the 

Balance of the Contract 547 



XV11 

Page 

(ii) Effect of Breach of the Whole Contract on 

Previously Accepted Instalments 549 

(iii) Breach with Respect to a Single Instalment .... 551 

(c) Breach of Instalment Contract by Buyer 552 

(d) Reinstatement of the Contract 553 

(e) Conclusion 554 

Recommendations 554 

PART VII 

Chapter 19 Miscellaneous Issues 561 

1. Applicability of Revised Act to Crown 561 

2. Limitation Period 562 

3. Conflict of Laws Provisions 564 

4. Transitional Provisions 564 

5. Conflicting Legislation 565 

Recommendations 567 

Conclusion 568 

VOLUME III 

Appendices 

1. Draft Bill to Revise The Sale of Goods Act 1 

2. The Sale of Goods Act, R.S.O. 1970, c. 421 67 

3. Selected Provisions of Article 1 of the Uniform 

Commercial Code 85 

4. Article 2 of the Uniform Commercal Code (as amended).. 89 

5. United Nations Commission on International Trade Law 
(UNCITRAL), Draft Convention on the International 

Sale of Goods (1977) 137 

6. Resolution of the Council of the Ontario Branch of the 
Canadian Bar Association, September 29, 1969 755 

7. Report of the Sub-Committee on Article 2 of the Uniform 
Commercial Code to the Commercial Law Subsection, 

Ontario Branch, Canadian Bar Association 157 

8. List of Research Papers prepared in the Sale of Goods 

Project of the Ontario Law Reform Commission 171 

9. Francis A. Miniter, "Comparative Analysis of Shipping 
Terms in 1NCOTERMS 1953 and Supplement and in 
Article 2 of the Uniform Commercial Code" 

(edited version) 173 

10. John D. McCamus, "The Frustrated Contracts Act: 

Proposals for Reform" 201 



List of Frequently Cited Sources and Abbreviations 



ATIYAH 



BENJAMIN 



C.M.A. STATISTICAL RESULTS 



P. S. Atiyah, The Sale of Goods 
(5th ed., 1975). 

Benjamin's Sale of Goods (1st ed., 
1974), (Gen. Editor: A. G. 
Guest). 

"The Canadian Manufacturers' 
Association Questionnaire and 
Statistical Results", Research 
Paper No. 1. 1 . 



DRAFT UNCITRAL CONVENTION Draft Convention on the Interna- 
tional Sale of Goods, as adopted 
by the United Nations Commis- 
sion on International Trade Law 
in June, 1977. 



DUESENBERG AND KING 



FRIDMAN 



N.S.W. WORKING PAPER 



NYLRC STUDY 



TREITEL 



ULIS 



WADDAMS 



R. W. Duesenberg and O. B. King, 
Sales and Bulk Transfers Under the 
Uniform Commercial Code 
(1966). 

G. H. L. Fridman, Sale of Goods 
in Canada (1973). 

Law Reform Commission, New 
South Wales, Working Paper on 
the Sale of Goods (1975). 

State of New York, Report of the 
Law Revision Commission for 
1955; Study of the Uniform 
Commercial Code (3 vols.)* 

G. H. Treitel, The Law of Con- 
tract (4th ed., 1975). 

The Uniform Law on the Interna- 
tional Sale of Goods, as adopted 
at a Diplomatic Conference at 
The Hague in April, 1964. 

S. M. Waddams, The Law of 
Contracts (1977). 



* Page numbers in the Report appear in square and round brackets. 



[xix] 



XX 



WARRANTIES REPORT 



Ontario Law Reform Commission, 
Report on Consumer Warranties 
and Guarantees in the Sale of 
Goods (1912). 



WHITE & SUMMERS 



WILLISTON 



James F. White and Robert S. 
Summers, Handbook of the Law 
Under the Uniform Commercial 
Code (1972). 

Samuel Williston, The Law Gov- 
erning Sales of Goods at Common 
Law and under the Uniform Act 
(Rev. ed., 1948) (4 vols.). 




Ontario 

Law Reform 

Commission 

Sixteenth Floor, 
18 King Street East, 
Toronto, Ontario. 
M5C 1C5 



To The Honourable R. Roy McMurtry, Q.C., 
Attorney General for Ontario 



Dear Mr. Attorney: 

We have the honour to submit herewith our Report on Sale of 
Goods. 



[xxi] 



PART I 
INTRODUCTION 



[1] 



CHAPTER 1 



ORIGIN OF PROJECT, 
ORGANIZATION AND METHODOLOGY 



The present Project began in February, 1970, with a Reference to 
the Ontario Law Reform Commission from the then Minister of Justice 
and Attorney General, the Honourable A. A. Wishart, Q.C. Pursuant to 
this Reference the Commission undertook a study of the Ontario Sale of 
Goods Act with a view to assessing the adequacy of this Act in the light 
of contemporary conditions and making recommendations with respect to 
the desirability of change. The Reference was inspired by a submission to 
the Minister of Justice by the Ontario Branch of the Canadian Bar As- 
sociation, a submission which, in turn, was based upon a recommenda- 
tion of the Commercial Law Subsection of the Association. This Sub- 
section had previously struck a special Sub-Committee to study Article 2 
of the American Uniform Commercial Code and to recommend to what 
extent the Article was suitable for adoption in Ontario. The Sub-Com- 
mittee reached the conclusion 1 that The Sale of Goods Act 2 was deficient 
in important respects and that Article 2 "should be enacted in the Pro- 
vince of Ontario . . .". 

Preliminary steps for the organization of the study requested by the 
Minister of Justice were taken by the Commission in 1970; before they 
could be completed, however, the Commission received a further and 
joint request from the Minister of Justice and the then Minister of Fin- 
ancial and Commercial Affairs, the Honourable A. B. R. Lawrence, Q.C, 
inviting the Commission to give first priority to a study of the law of war- 
ranties and guarantees in the context of consumer sales. The Commission 
agreed to this request and it was also agreed that the warranties study 
should constitute an integral part of the wider Sale of Goods Project. The 
Commission's Report on Consumer Warranties and Guarantees in the 
Sale of Goods was published in June, 1972. 

Serious work on the main Project was resumed in the summer of 
1972. The development of the Project proceeded in three distinct phases. 
During the first phase, a Research Team directed by Professor Jacob S. 
Ziegel, formerly of the Osgoode Hall Law School, York University, and 
now of the Faculty of Law, University of Toronto, prepared research 
papers and memoranda on a number of topics approved by the Commis- 
sion. These research papers are listed in an appendix to this Report. 3 The 
results of this research and the collective recommendations of the Re- 
search Team were then summarized and supplemented in a lengthy Re- 
search Report to the Commission, prepared by Professor Ziegel. It was 
thereafter the task of the Commission to embark upon a long and detailed 



!The Report of the Sub-Committee is reproduced as Appendix 7 to this Report. 
2Now R.S.O. 1970, c. 421. 
3 See, Appendix 8. 

[3] 



analysis of the Research Report, a task which may be considered the 
second phase of the Project. During this protracted analysis, the Commis- 
sion reached its own decisions with respect to all issues canvassed in the 
Research Report. Professor Ziegel and several of his colleagues were then 
requested to prepare a Draft Bill of a revised Sale of Goods Act incorpor- 
ating the Commission's decisions. The results of their efforts occupied the 
Commission's attention during the third phase of the Project. The Draft 
Bill, as extensively revised by the Commission, appears as an appendix to 
this Report. 4 

The research undertaken during the first phase of the Project fell, in 
turn, into two distinct parts. The first, which has already been mentioned, 
consisted of the preparation of research papers on specific topics in the 
law of sales and related areas in the law of contracts. The second part 
comprised a series of empirical studies which were designed to elicit infor- 
mation concerning current selling and purchasing practices in Ontario, 
particularly at the manufacturing level. It was hoped that such informa- 
tion would throw helpful light on the significance and adequacy of the 
existing rules of law. With the assistance of the Ontario Branch of the 
Canadian Manufacturers' Association, a very detailed questionnaire was 
distributed among members of the Association in August, 1972. This 
questionnaire produced 835 replies, of which 824 were received in time 
for detailed analysis and tabulation. 5 The replies produced a wealth of 
information which proved very helpful to individual members of the Re- 
search Team in the preparation of their papers, and which may also 
provide assistance to future researchers. 

The statistical inquiry was supplemented in several respects. First, 
an in-depth survey was conducted by Professor Michael Munson, then a 
member of the Faculty of Administrative Studies of York University, on 
the selling and purchasing practices of 25 representative businesses in 
Metropolitan Toronto. 6 Secondly, interviews and correspondence were 
conducted by Professor Ziegel and individual members of the Research 
Team with other companies and important trade associations. Thirdly, an 
analysis of contractual terms and warranty documents was compiled from 
materials received from respondents to the C.M.A. Questionnaire. 7 

An attempt was also made to solicit suggestions and observations 
from members of the business community and the legal profession through 
advertisements placed in widely circulating newspapers and in the Ontario 
Reports; however, these produced negligible results. 8 Equally disappoint- 
ing was the response to a questionnaire dealing with legal questions relat- 



4 See, Appendix 1. 

5 The results are analyzed in Mr. Barry D. Fisher's "Analysis of Computer Tabu- 
lation of Responses to Questionnaire Distributed to Ontario Members of the 
Canadian Manufacturers' Association", Research Paper No. 1.2. 

6 See, J. Michael Munson, "A Descriptive Overview of Marketing Functions as 
Perceived and Performed by the Entrepreneur", Research Paper No. 1.3. 

7 See, Paul Perell, "Analysis of Contractual Terms and Warranty Documents 
Based on Material Received from O.L.R.C. — C.M.A. Questionnaire Re- 
spondents", Research Paper No. 1.4. 

8 The same was true of a news release issued by the Commission on March 2, 
1972, announcing the Project and inviting submissions. 



ing to The Sale of Goods Act, which was distributed in the summer of 
1973 and later among a representative group of trade associations and 
organizations. The significance of this apparent apathy will be discussed 
in a later part of the Report. 9 

We wish to express our sincere appreciation to our Project Director, 
Professor Jacob S. Ziegel. This Report reflects not only his scholarship 
and abundant talents, but also his patience and dedication to the task of 
law reform. We are pleased to record our debt to Professor Ziegel. 

We are also pleased to acknowledge the contribution of members of 
the Research Team who gave so fully of their time and talents: Professor 
Marvin Baer, Professor Christopher Carr, Mr. Bradley Crawford, Mr. 
Norman May, O.C., Professor John McCamus, Professor Allen J. Myers, 
Professor J. Michael Munson, Professor W. A. W. Neilson, Professor 
Michael J. Trebilcock, and Professor Stephen M. Waddams. 

We also wish to thank Mr. L. R. MacTavish, Q.C., former Senior 
Legislative Counsel, for his assistance in the preparation of the Draft Bill. 
It would not have been possible to put forward this long and complex 
piece of legislation without the patience and expertise of Mr. MacTavish. 

We would be remiss if we were not also to mention the large num- 
ber of dedicated law students who worked on the Project. In particular, 
we wish to acknowledge the important contributions of Mr. Barry D. 
Fisher, Mr. Paul Perell, and Mr. Francis Miniter. Mr. Fisher played a 
pivotal role in the preparation of the C.M.A. Questionnaire and in the 
tabulation and evaluation of the results. Mr. Perell compiled an analysis 
of contractual terms and warranty documents based on materials received 
from respondents to the C.M.A. Questionnaire. Mr. Miniter served, dili- 
gently and capably, as a research assistant during the summers of 1977 
and 1978. To the Canadian Manufacturers' Association we extend our 
sincere thanks for their cooperation and assistance. 



9See, infra, at pp. 25-26. 



CHAPTER 2 

EVOLUTION OF MODERN SALES LAW 



1. The Anglo-Canadian Position 

The principles of sales law that we know today evolved very slowly 
and are mainly a product of late 18th century and particularly 19th cen- 
tury developments. 1 The Saxon and Norman periods apparently contri- 
buted very little to this branch of the law. 2 Indeed, in their nature, they 
were perhaps ill-suited to the development of a law of sales, given the 
simple and feudal state of the economy, the relative unimportance of 
personal chattels, and the undeveloped law of contracts. Moreover, severe 
restrictions were imposed by the actions in debt and detinue, and by the 
archaic procedures to which these actions were subject. Much more flex- 
ible procedures and rules, it would seem, were applied in the local courts 
in which the law merchant had its medieval origins. But whatever contri- 
bution might have been made by these courts towards the accelerated de- 
velopment of a body of sales law was lost when the common law courts 
assumed exclusive jurisdiction over disputes previously tried in the local 
courts. The introduction of the action in assumpsit, while laying the theo- 
retical foundations for the modern law, seemingly made little initial im- 
pact. Here, as elsewhere, economic and social conditions were the ultimate 
determinants of the pace of legal development, and the pressure for a de- 
tailed body of rules governing the law of sales did not really manifest 
itself until the arrival of the industrial revolution. 

Events moved quickly during the 19th century and, by 1888, it was 
felt that the rules were sufficiently settled to warrant their being reduced 
to statutory form. This was the year when MacKenzie D. Chalmers, the 
author of the highly successful Bills of Exchange Act, 1882, 3 was en- 
couraged to draft a similar bill embracing the sales area. 4 As Chalmers 
himself recorded, 5 Lord Herschell's advice to him was to endeavour "to 
reproduce as exactly as possible" the existing law, leaving any amend- 
ments that might seem desirable to be introduced in committee on the 
authority of the legislature. After detailed consideration by both Houses 
of Parliament, his draft bill was enacted into law in 1894 with one major 6 
and a number of minor changes. Thus was born the Sale of Goods Act, 
1893. 1 



!There does not appear to be a systematic treatment of the history of English or 
Canadian sales law. Holdsworth's A History of English Law contains a large 
number of brief references, rarely exceeding a page in length, scattered among 
the 17 volumes of his masterpiece. 

2 Compare, Pollock & Maitland, History of English Law (2d. ed., re-issued 
1968), Vol. I, pp. 57-60; Vol. II, pp. 207-10. 

345 & 46 Vict., c. 61 (U.K.). 

^Chalmers' Sale of Goods Act 1893, "Introduction to First Edition (1894)", re- 
printed in 14th ed., pp. ix et seq. See also, Chalmers, "Codification of Mercan- 
tile Law" (1903), 19 L.Q.R. 10. 

^Chalmers' Sale of Goods Act 1893, supra, at p. x. 

6 The bill was extended to include Scotland. 

756 & 57 Vict., c. 71 (U.K.). 

[7] 



8 

2. Post-1893 Developments 

The Imperial Act was quickly copied by most Commonwealth juris- 
dictions that followed the common law tradition. All of the common law 
provinces in Canada have enacted like legislation, albeit with a number 
of minor changes. 8 Manitoba was the first enacting province; for some 
unknown reason Ontario delayed its enactment until 1920. 9 

In the intervening years, the U.K. Parliament, has, on the whole, 
made few changes to the 1893 Act that are of interest to Canadian lawyers. 
It should, however, be noted that, as is true in Canada's case, the sales 
rules codified in the 1893 Act have been affected by important develop- 
ments in the public law and related private law areas. 10 The most impor- 
tant direct changes 11 are those effected by the following statutes: 

(1) The Law Reform (Enforcement of Contracts) Act 1954 P- This Act 
repealed Section 4, the Statute of Frauds provision, in the parent 
Act of 1893; 

(2) The Misrepresentation Act 1967. n This Act amended the law of mis- 
representation in important respects and also amended sections 
1 1 (1 ) (c) and 35 of the Sale of Goods Act; 

(3) The Supply of Goods (Implied Terms) Act 1973. u This Act amended 
sections 12-14 of the Sale of Goods Act and, until superseded by 
the Unfair Contract Terms Act 1977, restricted or excluded the use 
of exception clauses in consumer sales and other sales transactions, 
including hire-purchase and conditional sale agreements; 

(4) The Unfair Contract Terms Act 1977. ]5 This Act, which came into 
force on February 1, 1978, introduced a comprehensive regime, not 
restricted to sales transactions, for the restriction or avoidance of ex- 
ception clauses in consumer and non-consumer agreements. 

In 1967 the U.K. Parliament also adopted the Uniform Laws on Inter- 
national Sales Act 1967. ]e This Act gives municipal effect to the two Hague 
Conventions on the Uniform Law on the International Sale of Goods and 
the Uniform Law on the Formation of Contracts for the International Sale 
of Goods. 17 However, the Act is of minor importance since it only applies 
to international sales, as defined in the Conventions, and then only if the 



8 See the table of concordances in Fridman, Sale of Goods in Canada (1973), 

p. xlii. 
9S.O. 1920, c. 40. 

l°The related legislation is summarized in Benjamin's Sale of Goods (1974), 
paras. 12-17. To this list there may now also be added the Consumer Credit 
Act 1974, c. 39 (U.K.). 
11 For a complete list of the repeals and amendments up to 1974, see Benjamin, 

supra, para. 18. 
122 & 3 Eliz. 2, c. 34 (U.K.). 
131967, c. 7 (U.K.). 
141973, c. 13 (U.K.). 
151977, c. 50 (U.K.). 
161967, c. 45 (U.K.). 
i 7 See, infra, this chapter, section 5(a). 



parties have expressly adopted the Uniform Law on Sales as the law of 
their contract. 18 

This description of the British position would be seriously incom- 
plete if it did not also include a reference to the recommendations con- 
tained in a number of important reports and working papers published by 
the English Law Commission and Law Reform Committee. 19 While these 
recommendations have not yet been implemented, the reports and work- 
ing papers have been very helpful to us in our own deliberations. It should 
also be noted that, since the enactment of the Sale of Goods Act, 1893^ the 
basic law of contract and tort has undergone substantial judicial develop- 
ment, and that this judicial development has had an impact on the law of 
sales. Whether the judicial creativity has been sufficient to offset the de- 
ficiencies in the Act will be discussed in later parts of this Report. 

Legislative activity in Commonwealth countries, other than Canada, 
does not appear to have been more pronounced. Ghana adopted a slightly 
revised version of the U.K. Act in 1962. 20 The New South Wales Law 
Reform Commission published a Working Paper in 1975 21 recommending 
substantial changes to the New South Wales Sale of Goods Act. 22 We 
have derived great benefit from this Working Paper, but it does not pur- 
port to cover all aspects of the existing law or even all important aspects. 

The U.K. statutory changes so far have had a limited impact in 
Canada. Only British Columbia has copied the 1954 amendment, 23 and 
only one province, Saskatchewan, has adopted any of the 1973 amend- 
ments, and then only to a very limited extent. 24 However, disclaimer pro- 
visions, comparable to those in the 1973 Act, were anticipated in the Con- 



18 Benjamin, footnote 10 supra, para. 17. See, generally, Graveson, Cohn & 
Graveson, The Uniform Laws on International Sales Act 1967 (1968). 

i^See, for example, Law Reform Committee, Twelfth Report (Transfer of Title to 
Chattels) (1966), (Cmnd. 2958); Law Commission Working Paper No. 60, 
Firm Offers (1975); Law Com. W.P. No. 61, Penalty Clauses and Forfeiture 
of Monies Paid (1975); Law Com. W.P. No. 64, Liability for Defective Pro- 
ducts (1975); Law. Com. W.P. No. 65, Pecuniary Restitution on Breach of Con- 
tract (1975); Law. Com. W.P. No. 70, Law of Contract: the Parol Evidence 
Rule (1976). Early in their careers the English and Scottish Commissions em- 
barked on an ambitious project to codify the law of contract of England and 
Scotland. Had the project been completed it would no doubt have exerted a 
major influence on the development of future sales law. However, work on the 
project has now been suspended and the English Law Commission has decided 
instead to publish working papers on particular aspects of the law that appear 
in need of amendment. See Law Com. No. 58, Eighth Annual Report 1972-73, 
paras. 3-5; and Law Com. No. 64, Ninth Annual Report 1973-74, para. 7. 

20See, Sale of Goods Act, 1962, Acts of Ghana 1962, No. 137. (There is a hiatus 
with respect to the correct description of the Act. The present description is 
taken from the table of contents accompanying the Act.) 

21 Law Reform Commission, New South Wales, Working Paper on the Sale of 
Goods (1975). No final report has been published. 

22 The areas canvassed in the Working Paper are: the classification of express 
statements; the Statute of Frauds writing requirements; parol evidence rule; 
privity of contract; implied warranties; remedies for breach of warranty; and, 
frustration. 

23S.B.C. 1958, c. 52, s. 17. 

24See, The Consumer Products Warranties Act, 1977, S.S. 1976-77, c. 15, s. 11. 



10 

sumer Protection Acts of Ontario, Manitoba and British Columbia. 25 The 
Misrepresentation Act 1967 has attracted no followers and the prospect 
of the Unfair Contract Terms Act 1977 being copied verbatim seems 
equally doubtful, in view of the trade practices legislation that already 
covers a substantial part of the same ground in Ontario and elsewhere. 26 

This is not to suggest that the legislative scene in Canada has re- 
mained static; it has not. A large number of federal and provincial Acts 
have a direct and very important bearing on the parties' rights and obliga- 
tions in the sales sector, and their number has rapidly increased in the 
post-war period. Without attempting an exhaustive enumeration, several 
statutes are worthy of mention. At the federal level there are the follow- 
ing Acts: namely, the Bank Act; 21 the Bills of Lading Act; 2S the Combines 
Investigation Act; 29 the Consumer Packaging and Labelling Act; 30 the 
Food and Drugs Act; 21 the Hazardous Products Act; 22 the Motor Vehicle 
Safety Act; 33 the Textile Labelling Act; 34 and, the Weights and Measures 
Act 35 At the provincial level, legislation of Ontario includes the following 
enactments: The Bills of Sale Act; 36 The Business Practices Act; 31 The 
Consumer Protection Act; 38 The Factors Act; 39 The Mercantile Law 
Amendment Act; 40 The Motor Vehicle Dealers Act; 41 The Personal Prop- 
erty Security Act; 42 and, The Warehouse Receipts Act. 43 Much of the 
post-war legislation is consumer oriented, but its impact frequently ex- 
tends well beyond the law of consumer sales. 

The role of the Uniform Law Conference of Canada 44 should also 
be noted. Since its establishment in 1918 the Conference has been active 
in drafting uniform or model acts in the commercial law area and urging 
their adoption by the provinces. The Conference's efforts now embrace 
bills of sale and chattel mortgages, conditional sales and personal prop- 
erty security legislation, as well as uniform acts on Warehouse Receipts 
and Warehousemen's Liens. 45 The Conference's well-established role is of 



25 For details, see Ontario Law Reform Commission, Report on Consumer War- 
ranties and Guarantees in the Sale of Goods ( 1972), at pp. 55 et seq. 

26 For Ontario, see The Business Practices Act, S.O. 1974, c. 131. The problem of 
unconscionable terms is discussed infra, in chapter 7. 

27R.S.C. 1970, c. B-l, as am. 

28R.S.C. 1970, c. B-6. 

29R.S.C. 1970, c. C-23,asam. 

30S.C. 1970-71-72, c. 41. 

31R.S.C. 1970, c. F-27. 

32R.S.C. 1970, c. H-3. 

33R.S.C. 1970, c. 26 (1st Supp.). 

34R.S.C. 1970, c. 46 (1st Supp.). 

35S.C. 1970-71-72, c. 36. 

36R.S.O. 1970, c. 44, as am. 

37S.O. 1974, c. 131. 

38R.S.O. 1970, c. 82, as am. 

39R.S.O. 1970, c. 156. 

40R.S.O. 1970, c. 272. 

41R.S.O. 1970, c. 475, as am. 

42R.S.O. 1970, c. 344, as am. 

43R.S.O. 1970, c. 489. 

44 Formerly known as the Conference of Commissioners on Uniformity of Legis- 
lation in Canada. 

45 For the complete list of acts and the degree of their adoption by the provinces, 
see the annual Proceedings of the Conference. 



11 

considerable importance in view of the recommendation made later in 
this Report 46 with respect to the desirability of securing the uniform adop- 
tion of a revised Sale of Goods Act. 

3. The Quebec Position 

As a civil law jurisdiction, Quebec has never adopted the Sale of 
Goods Act. 47 Its law of sales is enshrined in the Quebec Civil Code 48 and 
owes its origin primarily to the corresponding provisions in the Napole- 
onic Civil Code. There are numerous differences between the sales law of 
Quebec and that of the common law provinces. It may be useful to note 
briefly some of the more important points of departure. 

The rules governing the formation of a contract of sale are not the 
same. Among other differences, written evidence is not required in the 
case of commercial matters, and in other transactions involving $500 or 
less. 49 Further, the doctrine of causa is much more liberal than the com- 
mon law doctrine of consideration. Thus, even though there is no separ- 
ate consideration, a "firm" offer cannot, where a period of duration is 
specified, be revoked during such period. 50 Moreover, a mailed acceptance 
is not usually effective until it is received by the offeree. 51 Contracts for the 
benefit of third parties are enforceable by the beneficiaries. 52 

The implied warranties also differ in important respects. The legal 
warranty against latent defects 53 is the civil law analogue to the common 
law condition of merchantable quality; but it is not as potent. In the case 
of a sale of specific goods, the civil law warranty does not extend to dis- 
coverable defects and the buyer is expected, for his own protection, to 
examine the goods before purchase and, it would seem, in at least some 
circumstances, to retain technical assistance to enable him to conduct a 
proper examination. 54 While the warranty against latent defects, unlike the 
condition of merchantability in the common law, applies to private as well 
as to commercial sales, the consequences of a breach of the warranty are 
not the same. In general, the buyer's remedies are limited to rescission of 
the agreement or a reduction in the purchase price, 55 and consequential 
damages are only allowed if the buyer can show that the seller knew or 
ought to have known of the defect. 56 

There are other differences, some of which may be mentioned briefly. 
The effectiveness of disclaimer clauses varies, 57 though it may be that the 



Mlnfra, p. 30. 

47 See, generally, Norman May, "Sales of Moveables in Quebec Law", Research 

Paper No. V.l. 
48Book III, Title V, arts. 1472-1595. 
49Que. C. Civ., art. 1233. 
^Renfrew Flour Mills v. Sanschagrin (1928), 45 Que. K.B. 29; Beaudry v. 

Randall, [1962] Que. Q.B. 577; May, footnote 47 supra, pp. 9-10. 
^Charlebois v. Baril, [1928] S.C.R. 88; May, footnote 47 supra, pp. 10-12. 
52 Que. C. Civ., art. 1029; May, footnote 47 supra, pp. 12-14. 
53Que. C. Civ., art. 1522. 
54 May, footnote 47 supra, pp. 22-25. 

55 Que. C. Civ., art. 1526; May, footnote 47 supra, pp. 27-28. 
56 Que. C. Civ., art. 1527; May, footnote 47 supra, pp. 28 et seq. 
57 May, footnote 47 supra, p. 26. 



12 

practical result is not very different from that obtaining in the common 
law provinces. The unpaid seller's in rem remedies differ in one impor- 
tant respect insofar as the seller can dissolve the sale and reclaim the 
goods, even after delivery, so long as they remain in the buyer's posses- 
sion. 58 Finally, the nemo dat doctrine plays a much less important role in 
Quebec law. The Civil Code protects the good faith purchaser who pur- 
chases goods in a fair or market or at a public sale or from a trader deal- 
ing in similar articles or "in commercial matters generally", unless the 
goods have been lost or stolen. 59 Even in the latter cases the owner is only 
entitled to recover the goods if he reimburses the purchaser the amount 
paid by him for the goods. 60 

The number and extent of the differences between Quebec law and 
the common law rules might suggest serious impediments to the flow of 
interprovincial trade between Quebec and its important trading partners. 
The answers to the C.M.A. Questionnaire belie this assumption. 61 Never- 
theless, it must remain a matter of regret that the laws of Quebec and 
Ontario differ so materially in such an important branch of commercial 
law. 62 The Quebec Civil Code Revision Office has recently completed a 
comprehensive review of the Civil Code, including the parts relating to 
sales and obligations, and has submitted proposals for a new Code. 63 This 
development, coupled with Ontario's own desire to modernize its sales 
law, could provide the two provinces with a valuable opportunity to ex- 
plore the possibility of securing greater uniformity between their respective 
laws. We return to this question in a later part of this Report. 

4. American Sales Law 

(a) the pre-code position 

Nineteenth century American sales law largely followed English prin- 
ciples, but the laws of the individual states differed from each other and 



5 8Que. C. Civ., arts. 1065, 1543; May, footnote 47 supra, pp. 39-40. 

5 9Que. C. Civ., art. 2268, para. 3; and compare, art. 1488. 

60Que. C. Civ., art. 2268, para. 4. 

61 Only 0.4% of the respondents indicated that they "always" encountered diffi- 
culties because of differences between the sales law of Ontario and Quebec. The 
percentages were 0.4% and 0.3% with respect to the other provinces and the 
U.S. respectively. 89.7% of the respondents indicated that they "never" encount- 
ered difficulties in their Quebec dealings or only "rarely": see, Fisher, "Analysis 
of Computer Tabulation of Responses to Questionnaire Distributed to Ontario 
Members of the Canadian Manufacturers' Association", Research Paper No. 1.2, 
Table 34, p. 105. It should be emphasized that these replies were received in 
1972 and may no longer reflect the current position. 

62 This sentiment appears to be shared by Professor Crepeau, Chairman of the 
Civil Code Revision Office. In a letter to Professor Ziegel, dated 14 June 1972, 
he wrote: "... I do firmly believe that there is no fundamental reason why the 
laws ought to be different from one province to another. The policies of the 
law are neither civil nor common". 

63 See, especially, Report on Obligations, Report No. XXX (1975), and Report on 
Sale, Report XXXI (1975); and now, Civil Code Revision Office, Report on 
Quebec Civil Code (1977), Vol. I, pp. 331 et seq. and pp. 387- 401; and also 
Miniter, "Annual Workshop on Commercial and Consumer Law, 1976: What 
Was Said" (1978), 2 C.B.LJ. 364, 379 et seq.; and Field, "A Common Law 
Look at the Law of Latent Defects in Quebec and the Proposals for its Re- 
form" (1977), 2 C.B.LJ. 209. 



13 

from the English rules on many points of detail and sometimes on points 
of substance. 64 An important objective, therefore, of the Uniform Sales 
Act drafted by Professor Samuel Williston of the Harvard Law School, 
and adopted by the National Conference of Commissioners on Uniform 
State Laws (NCCUSL) in 1906, was to reconcile the conflicting state 
rules and to introduce a uniform body of law. Williston admired Chalmers' 
Act and followed it closely. Nevertheless a substantial number of differ- 
ences survived between the Uniform Sales Act and the U.K. Sale of Goods 
Act. The more important differences included the following: namely, the 
wide definition of warranty in the American Act, 65 which was based on a 
reliance theory of liability and not restricted to contractual promises; the 
unitary classification of contractual terms as contrasted with the dichoto- 
mous classification of terms in the U.K. Act into warranties and condi- 
tions; a significantly different regime of buyer's remedies; 66 and, the sep- 
arate treatment of documents of title. 67 

(b) THE ORIGINS OF THE UNIFORM COMMERCIAL CODE 

At the time it was superseded by the Uniform Commercial Code, 
the Uniform Sales Act had only been adopted by thirty-six states. Willis- 
ton's work has been called a "scholarly reconstruction of nineteenth cen- 
tury law". 68 In any event, merchants of the Eastern seaboard felt that it no 
longer catered adequately to their needs and there was equal concern 
about the continuing lack of uniformity among the states. In 1936 the 
Merchants' Association of New York established a committee to prepare 
a federal Sales Act. 69 In its subsequent Report the committee recom- 
mended extensive changes in the Uniform Act. A bill was drafted and 
introduced in the Congress in 1940. 

The step was strongly opposed at the state level and the sponsors 
of the bill agreed to defer further action until the NCCUSL could con- 
sider revising the Uniform Sales Act. Work on the project was begun. 
Since the National Conference had also sponsored over the years a large 
number of other commercial law acts, which appeared equally in need of 
revision, the thought commended itself to the Commissioners that all the 
uniform acts in this area should be reviewed and integrated as part of a 
much more ambitious project. Thus was born the concept of a Uniform 
Commercial Code. 70 In 1942 the prestigious American Law Institute 
agreed to co-sponsor the Code project and work was begun. The first 
"Official Draft" of the Code was published in 1952 and approved with 



64 See, generally, McCurdy, "Some Differences between the English and the Ameri- 
can Law of Sale of Goods" (1927), 9 Jl. Comp. Leg. & Int. Law, Series III, 15. 

65 See, National Conference of Commissioners on Uniform State Laws, Uniform 
Sales Act (1906), s. 12. 

66 See, ibid., especially section 69. 

Si Ibid., ss. 27-40, as am. in 1922. 

68Gilmore, "On the Difficulties of Codifying Commercial Law" (1948), 57 Yale 
L.J. 1341, at p. 1342. 

69 See, State of New York, Report of the Law Revision Commission for 1955: 
Study of the Uniform Commercial Code, Vol. I, p. (348) (hereinafter referred 
toas"NYLRCStudy"). 

70 See, generally, Braucher, "Legislative History of the Uniform Commercial Code" 
(1958), 58 Col. L. Rev. 798. 



14 

minor changes by the sponsoring organizations. Pennsylvania was the first 
state to enact the Code and, since then, one or other version of the Code 
has been adopted by all the common law states and by the District of 
Columbia. Louisiana has adopted Articles 1, 3, 4 and 5 of the Code, 71 
but not Article 2, the Sales Article. The Code has been officially revised on 
a number of occasions, the most recent text being the 1972 Official Text. 72 
In an effort to avoid unauthorized changes and to maintain a watchful eye 
over developments, the sponsoring organizations established in 1961 a Per- 
manent Editorial Committee. The Committee has issued a series of reports 
and was also responsible for the production of the 1972 Official Text. It 
has not, however, been entirely successful in its mission since, prior to the 
1972 Official Text, a large number of unauthorized amendments had been 
made by individual states. 73 

(c) THE STRUCTURE OF THE UNIFORM COMMERCIAL CODE AND 
SOME GENERAL CONSIDERATIONS 

The 1972 Official Text is divided into eleven major parts, or Articles 
as they are called. Each Article deals with a separate area of substantive 
law, with the exceptions of Article 1, which deals with General Provi- 
sions, and Articles 10 and 11, which are concerned respectively with Ef- 
fective Date and Transitional Provisions. The intervening Articles are 
devoted to the following topics: 

Sales 

Commercial Paper 

Bank Deposits and Collections 

Letters of Credit 



Article 2 
Article 3 
Article 4 
Article 5 
Article 6 
Article 7 



Bulk Transfers 

Warehouse Receipts, Bills of Lading and other Docu- 
ments of Title 



Article 8 : Investment Securities 

Article 9: Secured Transactions, and Sale of Accounts and Chattel 
Paper 

It will be seen, therefore, that despite its ambitious title the Code is not 
exhaustive: it does not include such important branches of commercial 
law as insurance law or agency, and it omits an equally extensive list of 
subjects falling within the jurisdiction of the American federal government. 
The unifying thread, it has been stated, 74 which binds together Articles 2 

7iLa. Laws 1974, N. 92, effective 1/1/1975; Uniform Laws Annotated, Uniform 
Commercial Code, Cum. Ann. Pocket Part 1978, Table of Jurisdictions Where- 
in Code Has Been Accepted. 

72Unless otherwise indicated, all references in this Report are to the 1972 Official 
Text. 

73The amendments are noted in the Uniform Laws Annotated, Master Edition, of 
the Uniform Commercial Code. 

^Uniform Commercial Code, "General Comment of National Conference of 
Commissioners on Uniform State Laws and the American Law Institute", 
pp. xvi-xvii. 



15 

through 9 is the different phases in the movement of goods. Even this 
claim is not free of difficulty. Nevertheless, one can readily subscribe to 
the view that the Code is the most ambitious commercial law project ever 
undertaken in the Anglo-American legal world. 75 Equally impressive, from 
a Canadian point of view, is its universal acceptance among the common 
law states of the Union. 

A question of some interest is whether the Uniform Commercial 
Code is a true code in the continental sense. Some observers have made 
this claim, 76 but it is rejected by other scholars who were closely associated 
with the Code project. 77 The claim is inconsistent with the Code's own 
provisions and the subsequent course of judicial developments. Admitted- 
ly, the Code has a substantial number of the characteristics usually associ- 
ated with a code in the civilian sense: 78 it is systematic, comprehensive, 
and authoritative. But the Uniform Commercial Code is not self-sufficient. 
On the contrary, like the U.K. Sale of Goods Act, 1893 19 and Bills of Ex- 
change Act, 1882, S0 and other codifying statutes of British origin, it relies 
on the general principles of law and equity to supplement its specific pro- 
visions and to fill its numerous gaps. 81 There is equally little evidence, if 
indeed any, that the Code was intended to operate as an "undefiled" source 
of new law, 82 uncontaminated by what had preceded it, and serving as the 
exclusive repository of the solution to all future problems. Rather, the 
sign-posts point to a continuingly active role for judicial creativity in 
which the traditional techniques of lawmaking would be fully deployed 
within the bounds of a flexible system of stare decisis. The Code thus rep- 
resents a higher plateau in the development of American commercial law, 
but many of the familiar features of the old landscape are still very much 
in evidence. 



75See, Mentschikoff, "Highlights of the Uniform Commercial Code" (1964), 27 
Mod. L. Rev. 167. 

76 For example, Hawkland, "Uniform Commercial 'Code' Methodology", [1962] 
U. 111. L. Forum 291; Franklin, "On the Legal Method of the Uniform Com- 
mercial Code" (1951), 16 L. & Contemp. Prob. 330. 

77 "It is fair to say that the draftsmen of the Code had an anticodification or anti- 
statute predilection": Kripke, "The Principles Underlying the Drafting of the 
Uniform Commercial Code", [1962] U. 111. L. Forum 321, 331. 

78Compare, NYLRC Study, footnote 69 supra, Vol. I, p. (37). 

79 56 & 57 Vict., c. 71 (U.K.), s. 61(2). For the equivalent Ontario provision see 
R.S.O. 1970, c. 421, s. 57(1). 

8045 & 46 Vict., c. 61 (U.K.), s. 97(2). For the equivalent federal Canadian en- 
actment see the Bills of Exchange Act, R.S.C. 1970, c. B-5, s. 10. 

8l UCC 1-103. See, also, Summers, "General Equitable Principles under Section 1- 
103 of the Uniform Commercial Code" (in course of publication). Lord Her- 
schell's judgment in Bank of England v. Vagliano Bros., [1891] A.C. 107, 
(H.L.), at p. 145, is often cited for the proposition that in construing a codify- 
ing statute a court must first examine its language and determine its natural 
meaning, uninfluenced by any considerations derived from the previous state of 
the law. It is safe to say that, so far as the Sale of Goods Act is concerned, 
the canon has been more honoured in the breach than in its observance. The 
rule is even less meaningful in the Code context since many of the Official 
Comments to the sections extrapolate additional rules from the statutory text 
by repeated references to non-statutory principles or decisions. 

82 The expression is borrowed from Professor Gilmore. 



16 

(d) ARTICLE 2 83 

These remarks also apply to the sales article of the Code. As a 
learned scholar has observed, 84 while it was the pressure for a revised 
uniform sales act that launched the Code project, in the end it was 
Article 9 on Secured Transactions, and its innovative solutions to the 
chaotic state laws governing chattel security, that ultimately commended 
the adoption of the Code to many of the state legislatures. 

This is not to suggest that Article 2 is merely a moderately amended 
version of the Uniform Sales Act. In style and organization it differs 
fundamentally from its predecessor, but the overall result is not a revolu- 
tionary blue-print for a new sales law. Rather, it meets two of the Code's 
own explicit objectives, "to simplify, clarify and modernize the law govern- 
ing commercial transactions" and "to permit the continued expansion of 
commercial practices through custom, usage and agreement of the 
parties". 85 The more important changes to the Uniform Sales Act effected 
by the Article are the following: 86 

(1) Article 2 is more extensive in its coverage. It contains a sub- 
stantial number of sections 87 affecting the formation and con- 
struction of the contract of sale which have no counterpart in 
the Uniform Sales Act and which were designed to clarify or 
relieve the rigidities of the prior law. Article 2 also contains six 
sections 88 defining the meaning of shipping terms in use in 
domestic and international trade and also covering related 
matters. 

(2) The parties' freedom to shape the terms of their contract as they 
see fit remains a cardinal tenet, 89 but is qualified by important 
behavioural baselines in Articles 1 and 2 which cannot be ex- 
cluded and which are designed to prevent overreaching and to 
ensure fairness and standards of decency in commercial deal- 
ings. Particularly noteworthy are the following: namely, the de- 
finition of "good faith" as applied to merchants in section 2-103; 
the court's power to police unconscionable terms or bargains 
incorporated in section 2-302; and, the restrictions on or avoid- 
ance of disclaimer clauses affecting products liability claims 
found in sections 2-318 and 2-719. 

(3) The Code's basic framework of the seller's warranty obliga- 
tions 90 remains the same, but their scope is no longer restricted 



83 The literature on Article 2, as on other Articles of the Code, is colossal. For a 
selected bibliography see Barnett & Perell (eds.), "Selected Bibliography on Sale 
of Goods (other than warranties) and Selected Aspects of General Contract 
Law", Research Paper No. 1.5. 

84 John Honnold, in Ziegel & Foster (eds.), Aspects of Comparative Commercial 
Law (1969), p. 4. 

85See, UCC 1-102(2). 

86 Compare, NYLRC Study, footnote 69 supra, Vol. I, pp. (349) et seq. 

S7For example, UCC 2-204 to 2-210, 2-305, 2-306. 

88TJCC 2-319 to 2-324. 

S9UCC 1-102(3). The same rule obtains in the Ontario Sale of Goods Act, R.S.O. 
1970, c. 421, s. 53. 

90See, UCC 2-312 to 2-318. 



17 

by traditional doctrines of privity. As a result of the alternative 
versions of section 2-318, a seller's express or implied warran- 
ties extend to any person who may reasonably be expected to 
use, consume or be affected by the goods and who is injured by 
breach of the warranty. 

(4) The concept of title and its location, which played such a critical 
role in the Uniform Sales Act (as it still does in the U.K. and 
Ontario Acts) in furnishing the answer to widely disparate 
problems, has been dethroned. It has been replaced by an issue 
oriented approach, 91 which answers sale questions without re- 
gard to the locus of title. 

(5) The exceptions to the nemo dat rule have been enlarged, 92 old 
and troublesome distinctions between void and voidable trans- 
actions have been eliminated, 93 and the protection of third 
parties dealing in good faith with a merchant to whom the goods 
have been entrusted has been placed on a more rational foot- 
ing. 94 

(6) The importance of a merchant's status has also been enhanced 
in other directions by imposing upon him, in his capacity as 
buyer or seller, a higher regime of obligations than is applied to 
non-merchants. 95 However, this dichotomy between merchants 
and non-merchants is not nearly as significant as the more far- 
reaching distinctions between commercial and non-commercial 
sales known to many continental legal systems. 

(7) Article 2 places greater emphasis on the enforcement of bargains 
and discourages the rejection of goods based on trivial breaches 
or contrived excuses. Particularly noteworthy are the provisions 
on uncertainty (sections 2-204, 2-306), the right to cure an 
imperfect tender (section 2-508), and the substitutional 
methods of performance permitted in section 2-614 in the case 
of unforeseen difficulties. 

(8) At the remedial level, important changes have been introduced 
with respect to the scope and enforcement of the rights of both 
parties. Save in exceptional circumstances, the seller can no 
longer sue for the price before the buyer has accepted the 
goods. 96 On the other hand, the seller's right of stoppage in 
transitu is extended 97 and he may, at his option, where the 
buyer is in breach, resell the goods and recover any actual 
deficiency without being bound by the traditional market price 
test. 98 The unpaid seller is also given a limited right to recover 



9iSee, UCC 2-401, 2-501, 2-509, 2-703, 2-709, 2-711, 2-716. 

9 2See, UCC 2-403. 

93See, UCC 2-403(1). 

9 4See, UCC 2-403(2). 

95See, for example, UCC 2-201(2), 2-205, 2-314, 2-509(3), 2-603, 2-605. 

9 6See, UCC 2-709. 

9 ?See, UCC 2-705. 

9 8See, UCC 2-706. 



18 

his goods from an insolvent buyer." The buyer, for his part, 
enjoys more extended powers to seek an order for specific per- 
formance, 100 and his right to "cover" in the event of the seller's 
failure to perform is the counterpart of the seller's right of re- 
sale. 101 The conscious attempt to parallel the parties' rights is 
also seen in the retention of the Uniform Sales Act provision 
giving the buyer a lien on rejected goods in his possession 102 
and in his severely circumscribed right to recover goods identi- 
fied to the contract where the seller has become insolvent after 
receiving all or part of the purchase price. 103 Finally, attention 
should be drawn to the important right conferred on both parties 
to seek adequate assurance of performance (section 2-609) 
where reasonable grounds for insecurity arise with respect to 
the other party's performance. 

Most commentators welcomed these changes at the time they were 
first introduced and saw them as marked improvements over the prior law. 
Williston strongly dissented. 104 He regretted the iconoclastic approach to 
the Uniform Sales Act and was critical of some of the major changes. He 
did not feel that any advantages Article 2 might possess would offset the 
breach in the substantial uniformity in the sales law in most of the com- 
mon law jurisdictions, both in and outside the U.S., that would result from 
its adoption. Many of Williston's misgivings have been proved unfounded 
by subsequent events. 105 On the whole, Article 2 has worked well. Al- 
though it has proved least successful in directing the growth of products 
liability law arising out of defectively manufactured goods, Article 2 ap- 
pears to have spawned a relatively small number of important lawsuits, 
and only one major amendment has been found necessary since the 
adoption of the 1958 Official Text. 106 Williston's prediction was, however, 
accurate in one respect: Article 2 has broken the uniformity of basic sales 
law in the common law jurisdictions. However, non-American commenta- 
tors 107 only see the breach as a reflection of the dated character of many 
of the provisions in the U.K. Act. Whether the breach can be healed and 
uniformity restored is a question that will be considered in a later section 
of this Report. 108 

(e) UNIFORM LAND TRANSACTIONS ACT 

In August, 1975, the National Conference of Commissioners on Uni- 



99See, UCC 2-702. 

lOOSee, UCC 2-716. 

JOiSee, UCC 2-712. 

1 02See, UCC 2-71 1(3). 

103UCC 2-502. 

I04\villiston, "The Law of Sales in the Proposed Uniform Commercial Code" 
(1950), 63 Harv. L. Rev. 561. An article by Corbin supporting the proposed 
Code appeared soon after the publication of Williston's criticism: see, Corbin, 
"The Uniform Commercial Code — Sales: Should it be Enacted?" (1950), 
59 Yale L.J. 821. 

105 See, Honnold, in Ziegel and Foster, footnote 84 supra, at p. 5. 

J06See, UCC 2-3 18. 

i07See, for example, Sutton, "The Reform of the Law of Sales" (1969), 7 Alta. 
L. Rev. 130, at p. 173; Fridman, in Ziegel & Foster, footnote 84 supra, ch. 2; 
and Fridman, Sale of Goods in Canada (1973), ch. 13. 

\®%lnfra, ch. 3, sec. 5. 



19 

form State Laws approved the Uniform Land Transactions Act and recom- 
mended it for enactment by the states. 109 The Uniform Act deals with 
contractual transfers of real estate, including transfers for security and 
transfers of limited interests, and purports to do for transactions in land 
what Articles 2 and 9 of the Uniform Commercial Code do in the realm 
of personal property. What is significant in the present context is the fact 
that the ULTA follows closely the structure and concepts of the corres- 
ponding provisions in the Code. 110 This seems to indicate both the ad- 
aptability of the Code and a pervasive feeling that it is operating well and 
has not lost its essential relevance. 

5. International Developments 

This survey of the evolution of modern sales law would be incom- 
plete without some reference to developments at the international level. 
The need for uniformity in the law and practices governing international 
trading transactions has long been obvious. Since the war, increasing 
efforts have been mobilized at both the governmental and non-governmen- 
tal levels to advance this objective. 111 As one of the world's major ex- 
porters and importers, Canada has an important stake in these develop- 
ments. The legislative and other efforts to achieve international uniformity 
may also provide useful sources for national reforms and for uniformity 
within federal states, like Canada, where more than one legal system of 
private law obtains. The following organizational and legislative initiatives 
are of particular significance in the sales area. 

(a) THE HAGUE CONVENTIONS OF 1964 112 

Formal efforts to draft a uniform law on international sales began 
in 1 930 when the International Institute for the Unification of Private Law 
(UNIDROIT) appointed a committee for this purpose. In 1939 two 
reports accompanied by draft uniform laws were presented by the com- 
mittee to the League of Nations. Work on the project was suspended until 
1951 when, following a conference on the eve of the 7th Hague Confer- 
ence of Private International Law, a Special Committee of Experts was 
appointed to resume the work of drafting. The committee presented its 
revised draft in 1956. At the same time a Committee of the Rome Insti- 
tute was engaged in drafting a Uniform Law on the Formation of Contracts 
for International Sales. The two drafts formed the basis of an intensive 
conference at The Hague in 1964 and resulted in the adoption of two 
conventions, one on a Uniform Law on the International Sale of Goods 113 
and the other on a Uniform Law on the Formation of Contracts for the 



10 9TJniform Laws Annotated, Vol. 13, 1978 Pamphlet, pp. 47 et seq. 

no Ibid., pp. 47-48; and Miniter, "Annual Workshop on Commercial and Consumer 
Law, 1976: What Was Said" (1978), 2 C.B.LJ. 364, 392 et seq. 

111 Progressive Development in the Law of International Trade: Report by the 
Secretary-General, UNCITRAL Yearbook, Vol. I, 1968-1970, pp. 18-45. 

112 The account which follows is based on Graveson, Cohn & Graveson, The Uni- 
form Laws on International Sales Act 1967 (1968), pp. 1-3. See also passim, 
Tunc, Commentary of [sic] the Hague Conventions of 1st July 1964 on the 
International Sale of Goods and on the Formation of Contracts of Sale (un- 
dated). 

113 Hereafter referred to as ULIS or the Uniform Law on Sales. 



20 

International Sale of Goods. 114 To date the conventions have only been 
ratified or acceded to by nine, mainly smaller, countries. 115 Canada and 
the U.S. are not among them. In view of the substantial criticism 116 to 
which the Uniform Law on Sales has been exposed, and the revisionary 
work recently completed under the auspices of the United Nations Com- 
mission on International Trade Law (UNCITRAL), it seems unlikely that 
many more adoptions will materialize in the foreseeable future. 

The Uniform Law on Formation is by far the shorter of the two Laws 
and comprises thirteen articles which, needless to say, do not exhaust the 
subject. Articles of particular interest include the following: namely, the 
dispensation with writing requirements (art. 3); the binding character of 
an irrevocable offer (art. 5) ; the time and form of acceptance (arts. 6, 8) ; 
the effect of additions, limitations or other modifications in the acceptance 
(art. 7); the effect of a late acceptance (art. 9); and, the validity of a 
revoked acceptance (art. 10). Some of these provisions may have been in- 
fluenced by Article 2 of the Uniform Commercial Code. 

The Uniform Law on Sales is much longer and runs to 101 articles. 117 
These are divided into six chapters which deal, respectively, with the 
Sphere of Application of the Law (ch. I), General Provisions (ch. II), 
Obligations of the Seller (ch. Ill), Obligations of the Buyer (ch. IV), 
Provisions Common to the Obligations of the Seller and the Buyer 
(ch. V), and Passing of the Risk (ch. VI). Despite its considerable length, 
the Uniform Law on Sales fails to deal with some important topics. It is 
not concerned with the substantive validity of the contract of sale or, with 
minor exceptions, with its property effects or the rights of third parties 
acquiring the goods from the party in possession. Questions of products 
liability not involving the buyer are also excluded. The parties' right to 
exclude or vary the provisions of the Uniform Law on Sales are recog- 
nized in article 3; however, unlike Article 2 of the Uniform Commercial 
Code, the Uniform Law provides no behavioural baselines to discourage 
unconscionable terms and to ensure reasonable standards of fair dealing. 
These omissions are no doubt due to the much more limited objectives of 
the Uniform Law. 

In style and methodology the Uniform Law on Sales is more abstract 
and succinct than Article 2 and follows the civilian style of drafting rather 
than the common law tradition. Nevertheless, as in the case of the Uniform 
Law on Formation, some important resemblances to Article 2 can be de- 
tected in a number of provisions, examples of which are as follows: 
namely, the right to cure an imperfect tender (arts. 37 and 44); the right 
to suspend performance on grounds of insecurity (art. 73); and, the buy- 
er's right to cover and the seller's right of resale and right to recover a 
deficiency (art. 85). Close similarities between the solutions adopted in the 
Uniform Law on Sales and those obtaining in the U.K. Sale of Goods Act, 



114 Hereafter referred to as ULFC or the Uniform Law on Formation. 
115 The nine countries are Belgium, Gambia, Israel, Italy, San Marino, the Nether- 
lands, the U.K., the Vatican, and West Germany. 
H6See, for example, UNCITRAL Yearbook, Vol. I, 1968-70, pp. 159 et seq. 
117 The Law is reproduced in Graveson, footnote 112, supra. 



21 

1893 are evident in other areas. 118 In many other respects the Uniform 
Law on Sales differs materially both from Article 2 and Anglo-Canadian 
sales law. Differences that have attracted unfavourable attention 119 include 
the difficult definition of fundamental breach in article 10, the complex 
system of notices, and the concept of ipso facto avoidance. 

(b) UNCITRAL 

The United Nations Commission on International Trade Law was 
established by the General Assembly in 1966 with the object of promot- 
ing the progressive harmonization and unification of the law of interna- 
tional trade. 120 The Commission consists of 29 elected members of the 
United Nations who are drawn from the various geographical regions and 
principal economic and legal systems of the world. 

The Commission meets annually, but the detailed work on individual 
projects is frequently delegated to small working groups. Since its creation 
the Commission has focused its activities on four major areas of interna- 
tional trade law: namely, international sale of goods; international pay- 
ments; international commercial arbitration; and, international shipping 
legislation. Its principal project in the sale of goods area has been to re- 
view the Uniform Law on the International Sale of Goods. The purpose of 
this review has been to prepare a revised text that might render the Uni- 
form Law more acceptable to countries of different legal, social and eco- 
nomic systems than the 1964 version. A working group was established in 
1969 and completed its work in 1976. 121 The draft Convention on the 
International Sale of Goods prepared by the Working Group was approved 
at a plenary session of the Commission in June, 1977. 122 The Working 
Group has also subjected the Uniform Law on Formation to a similar re- 
view and completed this phase of its work in 1977. 123 At its Eleventh 
Session, held from May 30 to June 14, 1978, the Commission decided to 
integrate the draft Convention on Formation with the draft Convention on 
the International Sale of Goods, and adopted a single draft Convention on 
Contracts for the International Sale of Goods. 124 It is anticipated that the 



118 See, Szakats, "The Influence of Common Law Principles on the Uniform Law 
on the International Sale of Goods" (1966), 15 Int. & Comp. L.Q. 749, espe- 
cially pp. 752 et seq. 

119 Compare, Honnold, "The Uniform Law for the International Sale of Goods: 
The Hague Conventions of 1964" (1965), 30 Law & Contemp. Prob. 326. 

i20UNCITRAL Yearbook, Vol. I, 1968-1970, pp. 65-66. See also, Honnold (ed.), 
Unification of the Law Governing International Sale of Goods (Paris, 1966). 

i2 l Report of the Working Group on the International Sale of Goods on the Work 
of its Seventh Session, United Nations, General Assembly, A/CN. 9/116. 

122TJNCITRAL, Report on Tenth Session (1977), General Assembly, Official 
Records: Thirty-Second Session, Supp. No. 17 (A/32/17), pp. 10 et seq. The 
Draft Convention is reproduced in Appendix 5 to this Report. 

123 UNCITRAL, Report of the Working Group on The International Sale of Goods 
on the Work of its Ninth Session, A/CN. 9/42, Add. 1, 18 Nov., 1977. 

i24UNCITRAL, Report on Eleventh Session (30 May-14 June, 1978), General 
Assembly, Official Records: Thirty-Third Session, Supp. No. 17 (A/33/17). The 
integrated document reached us too late for incorporation in the text of our 
Report and, unless otherwise indicated, all references are to the earlier draft 
Convention on Formation, footnote 123 supra, and draft Convention on the 
International Sale of Goods, footnote 122 supra. 



22 

integrated draft Convention will be submitted for approval in the near 
future at a diplomatic conference to be convened for this purpose. 

The draft Convention on Sale follows the same structure as the Uni- 
form Law, but it is substantially shorter and, in several respects, simpler. 125 
The greater economy of the draft Convention is largely achieved by sub- 
stituting for repetitive provisions in the Uniform Law, 126 an integrated 
regime of buyer's and seller's remedies for breach. Other significant dif- 
ferences are the adoption of a considerably simplified definition of funda- 
mental breach 127 and the elimination of the concept of ipso facto avoid- 
ance. 

(c) UNIDROIT 

The role of the International Institute for the Unification of Private 
Law in Rome, in initiating and promoting the drafting of the Uniform 
Laws, has already been noted. The Institute has also been active in cog- 
nate areas of commercial law that have an important bearing on interna- 
tional sales law. 128 Work in progress or completed includes draft uniform 
laws on the Conditions of Validity of the Contract of Sale and on Agency 
of an International Character in the Sale and Purchase of Goods. Of par- 
ticular interest is the draft Uniform Law on the Protection of the Bona 
Fide Purchaser of Corporeal Moveables, which was first published by the 
Institute in 1968 and subsequently revised in June, 1974. 

(d) THE INTERNATIONAL CHAMBER OF COMMERCE 

The Chamber, which enjoys consultative status under the charter of 
the United Nations, has long been active in promoting uniformity and 
greater harmonization in international trade terms and practices. In this 
regard, the Chamber has compiled interpretative and definitional manuals 
and standard conditions, which parties to international contracts are free to 
incorporate by reference in their agreements. Among the Chamber's better 
known publications are the International Rules for the Interpretation of 
Trade Terms (commonly referred to as INCOTERMS 1953) and the 
Uniform Customs and Practice for Documentary Credits (1974). 129 Both 
documents are widely used in international trading transactions. 

(e) UNITED NATIONS ECONOMIC COMMISSION FOR EUROPE 

Under the auspices of the Economic Commission for Europe, a wide 
variety of general conditions of sale and standard forms of contracts have 
been drafted by working parties for use in contracts for the supply of plant 
and machinery for export and import. The Commission has also sponsored 
model contracts for the sale of cereals, citrus fruit, sawn softwood, solid 
fuel, potatoes, and steel products. 



125 The draft Convention comprises 68 articles compared with the Uniform Law's 

101 articles. 
126 Compare, draft Convention, arts. 27-34 and 43-47, with Uniform Law, arts. 24- 

32, 41-49, 61-64, 66 and 70. 
127 Compare, draft Convention, art. 8, with Uniform Law art. 10. 
128TJNIDROIT, [1974] Uniform Law Review 13, at pp. 15 et seq. 
129T.CC Pub. No. 274 and Pub. No. 290. 



CHAPTER 3 



THE NEED FOR A REVISED SALE OF GOODS ACT: 
ITS FORM AND RELATED QUESTIONS 



1. The Lawyer's View 

Commonwealth scholars have for a substantial time recognized im- 
portant defects in The Sale of Goods Act and have urged amendments or 
adoption of a revised Act. The Sub-Committee of the Commercial Law 
Subsection of the Ontario Branch of the Canadian Bar Association, whose 
Report led to the establishment of the present Project, shared these senti- 
ments, 1 as do the members of our Research Team. The Commission agrees 
with both these bodies. The defects in the existing Act can be fairly readily 
divided into two phases; namely, those defects that have existed from the 
beginning, and those defects that have emerged as a result of subsequent 
developments. 

Among the original defects there may be included the following: 

(1) the unsatisfactory distinction between warranties and conditions 
and between contractual and non-contractual representations; 

(2) the artificial restrictions on the remedies of the buyer in a sale 
of specific goods under section 12(3), and the ambiguities about 
the scope and extent of the buyer's rights of examination and 
rejection under sections 33 and 34; 

(3) the conflict between sections 12(3), 29, and 33 and 34; 

(4) the need to show that a sale is a sale "by description" in order 
to render applicable the implied conditions of merchantability 
and fitness for purpose, and the ambiguities concerning the 
scope and interpretation of the implied warranties and condi- 
tions; 

(5) the conflict in wording and policy between sections 25(1) and 

25(2); 

(6) overconceptualization of the significance of title and the con- 
sequences flowing therefrom; 

(7) ambiguity about the unpaid seller's resale rights with respect to 
goods in his possession, and unjustifiable restrictions on the 
buyer's right to obtain an order for specific performance; and, 



Un its Report, the Sub-Committee states, "The consensus of opinion of the 
Sub-Committee is that the present Sale of Goods Act of Ontario is not adequate 
to deal with today's commercial transactions and the problems arising in the 
course of such transactions. The Sub-Committee is of the opinion also that 
Article 2 should be enacted in the Province of Ontario firstly in order to re- 
move the present inadequacy in the law and secondly in order to establish 
uniformity of sale of goods legislation with the United States in view of the 
magnitude of commercial transactions involving parties in Ontario and parties 
in states of the United States": See, Report of the Sub-Committee on Article 2 
to the Commercial Law Subsection, Ontario Branch, Canadian Bar Association, 
appended hereto as Appendix 7. 

[23] 



24 

(8) the inadequate or, indeed, non-existent provisions concerning 
shipment and payment obligations, particularly with respect to 
imports and exports, and the failure to appreciate the importance 
of emerging credit transactions, both in their impact on pay- 
ment methods, domestic and international, and with respect to 
the reservation of title. 

Among the problems and issues generated by post-1893 develop- 
ments, the following deserve particular emphasis: 

(1) the anomalous nature of the traditional distinction between 
sales and near-sales transactions in determining the parties' 
rights and obligations; 

(2) increasing dissatisfaction with basic contract doctrines, in par- 
ticular those affecting: 

(i) Statute of Frauds requirements; 

(ii) the parol evidence rule; 

(iii) the scope and role of consideration as a basis for the en- 
forcement of promises and the modification of contractual 
rights; 

(iv) the distinction between void and voidable mistakes and 
the consequences flowing from this distinction; 

(v) the doctrine of certainty of terms as a prerequisite to the 
enforceability of bargains, particularly in the context of 
price; and, 

(vi) the privity of contract rule, particularly in the context of 
manufacturers' express warranties. 

(3) the increasing disparity in bargaining power, not only between 
consumers and suppliers, but also between businessmen; the 
prevalence of standard form contracts and disclaimer clauses 
of various types; and, the frequency of the use of conflicting 
forms by sellers and buyers; 

(4) the revolution in manufacturing, distribution and retailing 
methods and in the quantity and kind of goods being manufact- 
ured that has occurred since the turn of the century, and the 
resulting need to come to grips with the scope and nature of a 
manufacturer's liability for defective goods to the ultimate user 
or purchaser, whether based on warranty concepts or under 
tort law; 

(5) the need for a clearer understanding of the basis of damage 
claims and the freedom of the parties to allocate losses arising 
from a breach of contract; and, 

(6) the need to review the nemo dat doctrine and the exceptions 
to it and to establish a modernized and integrated law of chat- 
tel security in conjunction with the establishment of an efficient 
central registry system. 



25 



2. Businessmen's Attitudes 



Although commercial lawyers would readily recognize the problem 
areas that we have identified, it must be admitted that there is little evi- 
dence that the business community feels equally keenly about the need 
for a revised Sale of Goods Act. There appears, rather, to be a fairly 
pervasive feeling that legal rules are not very relevant in the conduct of 
everyday business relationships, 2 and that such difficulties as may arise 
from time to time can be resolved amicably and without resort to the 
courts. This mood, which has been noted by other observers, 3 emerges 
fairly clearly from several sources: namely, from the answers to several 
questions in the CM. A. Questionnaire; from the paucity of litigation in the 
sales area; 4 from the in-depth profile of selling and purchasing practices 
mentioned earlier; 5 and, from the negligible response to both the ques- 
tionnaire dealing with legal questions under The Sale of Goods Act, and the 



2 As one businessman observed in a letter to the Research Team, "While the 
Sale of Goods Act and pre-printed Terms of Purchase and Terms of Sale are 
doubtless of interest to lawyers, like most laymen, I feel that if much attention 
were paid to them in the real world, it would be impossible or impractical to 
efficiently buy or sell anything." On the other hand, the assistant general coun- 
sel of a major Canadian manufacturer of industrial and consumer durable 
goods told the Team that his company paid great attention to legal questions 
affecting the company's sale and purchase operations. Possibly the difference 
lies in the type of operation conducted by the company. A company that pro- 
duces or sells a standard item may encounter few difficulties once the basic 
design and manufacturing problems have been overcome. A company manu- 
facturing intricate and expensive items to specification, on the other hand, may 
be exposed to heavy damage claims if the product turns out to be defective or 
there is a delay in completion and delivery. 

3 See, for example, Macaulay, (1963), 28 Am. Soc. Rev. 55; and Macaulay, 
"Use and Non-use of Contracts in the Manufacturing Industry"; a panel 
(Macaulay, Kerwin, Diotte, Lungren, Baker, Nelson) (Nov. 1973), 9 Prac. 
Law 13, at p. 17. 

4 59.1% of the CM. A. respondents claimed they never resorted to or became in- 
volved in litigation; 95.8% said they rarely became involved. If missing ob- 
servations are treated as negative replies, 90.7% of the respondents were not 
involved in any kind of sales litigation in 1971, the year preceding the Ques- 
tionnaire. The percentages were 92.2%, 94.4%, and 94.2% for the years 1970, 
1969, and 1968 respectively. See, Fisher, Research Paper No. 1.2, pp. 85-87; 
and, "The Canadian Manufacturers' Association Questionnaire and Statistical 
Results", Research Paper No. 1.1, questions 91-92. 

A survey conducted by James Murray, a student assistant to the Project, of 
sales litigation cases noted in Canadian Current Law for the years 1971-74 
produced the following results: 

Parties: Consumer Actions 14 ) . 

Industrial (business) 28 ) 

Type of Goods: Industrial — Durable 20 ) 

Non-durable 8 ) 28 

Consumer — Durable 11 ) 1 . 

Non-durable 3 ) 14 

These figures should be compared with the number of consumer complaints 
received by government departments and other agencies quoted in Chapter 1 
of the Ontario Law Reform Commission's Report on Consumer Warranties and 
Guarantees in the Sale of Goods (1972). 
5 See, Munson, Research Paper No. 1.3, at pp. 20-22. 



26 

advertisements soliciting suggestions with respect to desirable changes in 
the Act. 

This apathy may be discouraging but it is not, we believe, a reliable 
guide to the need for a revised Act or the scope of its provisions. We 
base this view on a number of grounds. First, many of the C.M.A. respon- 
dents represent substantial and well-organized business establishments 6 
who are in a position to anticipate contractual conflicts and to resolve them 
by professionally drafted documents. Secondly, the paucity of litigation in 
the sales area is based on principles of reciprocity and the commendable 
desire of businessmen to resolve their differences amicably. It does not 
appear to be based on the certainty or adequacy of the existing law. Hence, 
little guidance is provided to the courts or to the parties' legal advisers 
where, for whatever reason, disputes proceed to trial. 7 Thirdly, in several 
key areas, particularly those involving warranty and damage problems, 
there is a notable lack of consensus between buyers and suppliers as to 
the right solutions to be applied. 8 Finally, the C.M.A. replies and the in- 
depth survey of selling and buying practices, show the wide gulf between 
the existing law and what many businessmen believe it to be; for ex- 
ample, with respect to the prerequisites of a binding contract. 9 

3. What Kind of Revised Act? 

If the need for a revised Act is conceded, there arises the question of 
its form. There would appear to be three major alternatives: 

(1) to retain the essential structure and conceptual framework of 
the existing Sale of Goods Act and to amend the Act where 
necessary; 

(2) to adopt Article 2 of the Uniform Commercial Code in toto 
subject only to changes in drafting style to conform to Ontario 
usage; or, 

(3) to draft an entirely new Act which borrows heavily from Article 
2 but is not simply a copy of it. 

Each of these approaches has a number of advantages and disadvantages. 
So far as the first approach is concerned, amendment of the existing Act 
might facilitate continuing uniformity of the sales law of the Common- 
wealth countries and, further, might enable us to retain the benefit of the 
substantial body of jurisprudence that has accumulated to date. The dis- 
advantage of an amended Sale of Goods Act is that, by the time all the 



6 Only 25.8% of the respondents had estimated annual sales of less than $1 
million. 3.4% of the respondents accounted for 50.1% of the categorized 
value of total sales: Fisher, footnote 4 supra, Table 1, p. 11. 

7 For some recent, illustrative, cases see Beaver Specialty Ltd. v. Donald H. 
Bain Ltd., [1974] S.C.R. 903, (1974), 39 D.L.R. (3d) 574 (S.C.C.); Canso 
Chemicals Ltd. v. Canadian Westinghouse Co. Ltd. (1975), 54 D.L.R. (3d) 
517 (N.S.C.A.); Gilbert Steel Ltd. v. University Construction Ltd. (1976), 12 
O.R. (2d) 19, 67 D.L.R. (3d) 606 (C.A.), noted by Waddams in (1977), 2 
C.B.L.J. 232; and Cehave N.V. v. Bremer Handelgesellschaft m.b.H., [1976] 
1 Q.B. 44 (C.A.). 

8 See, infra, chs. 9, 16, 17. 

nnjra, ch. 5. 



27 

desirable changes have been made, little would remain of the original Act. 
It would, therefore, be illusory to call it an amended Act. Moreover, al- 
though uniformity remains a very desirable goal, the extent to which uni- 
formity could be maintained among the principal Commonwealth coun- 
tries is highly conjectural. In the commercial sphere, the U.K. appears to 
be leaning more heavily towards the Common Market countries than its 
Commonwealth partners, and this tendency is likely to be accentuated in 
the future. In any event, if uniformity is to be maintained, it would be 
better to secure it in the form of a commonly agreed revised Act than by 
continued reliance on a substantially obsolete Act. 

The second approach, the integration of Article 2 into Ontario law, 
has some significant advantages. Article 2 is a carefully conceived law, 
flexible in nature, and sensitively attuned to the needs of an evolving com- 
mercial economy. It is in force in all the American states with the ex- 
ception of Louisiana, and appears on the whole to be working very suc- 
cessfully. It has been used as the prototype for important parts of the 
Uniform Land Transactions Act. Article 2 has spawned a large exegetical 
literature, and Ontario lawyers would have the benefit of a readily 
accessible and growing volume of jurisprudence. The United States is 
also our closest trading partner 10 and this, in itself, speaks for the desir- 
ability of a common sales law. Finally, Ontario has copied or been strong- 
ly influenced by other parts of the Uniform Commercial Code, namely 
Articles 8 and 9, and the adoption of Article 2 would therefore continue 
an existing trend. 

There are, however, also disadvantages. Some important provisions 
in Article 2 are already dated; for example, the disclaimer provisions in 
section 2-3 1 6. n Further, the provisions in section 2-318 have been sub- 
stantially superseded by subsequent tort law developments. 12 Moreover, 
the Statute of Frauds provisions, section 2-201, might well be regarded as 
obsolete 13 and others, such as section 2-207, which deals with conflicting 
terms, have not worked particularly well. 14 Some of the Code provisions 
may be regarded as too rigid, (for example, the perfect tender rule under 
section 2-601 ), 15 or too radical, (for example, the seller's disentitlement 
to sue for the price except where the buyer has accepted the goods under 
section 2-709 ). 16 Certain of the provisions may also be ultra vires the 
provinces, and others may be deemed inappropriate in an Ontario Sales 



^Approximately two thirds of Canada's total external trade is conducted with 
the United States: Canada Year Book, 1976-77, para. 18.2.2. 41.6% of the 
CM A respondents reported doing some selling to the U.S.: see, Research Paper 
No. 1.1, Q. 13c. It is also significant that 41.1% of the respondents were sub- 
sidiaries of American corporations: see Fisher, Research Paper No. 1.2, p. 5. 

H/n/ra, ch. 9. 

Wnfra, ch. 10. 

13 Infra, ch. 5. 

Mlbid. 

^Infra, ch. 17. 

16 /«/ra, ch. 16. 



28 

Act. 17 Finally, the Code's drafting style differs substantially from accepted 
Ontario usage. 

In the light of the above considerations the Commission recommends 
the third alternative; that is, the adoption of an entirely new Sale of Goods 
Act which borrows heavily from Article 2 of the Uniform Commercial 
Code but is not simply a copy of this Article. We have thought it de- 
sirable to reflect our recommendations in legislative form, and have, 
accordingly, prepared a Draft Bill which we append to this Report. 18 
The pervasive influence of Article 2 may be discerned from a reading of 
this Draft Bill. Our approach has been to review Article 2 systematically 
and in great detail. In so doing, we have deleted, amended, or redrafted 
those provisions that we deem inappropriate or unnecessary in the Ontario 
context, or unacceptable on grounds of policy. We have also attempted 
to bridge the gap between the language of Article 2 and accepted 
Ontario legislative form. The dominant influence has been Article 2, but 
this has not been our exclusive source. In a number of important areas 
we have sought to produce a synthesis of the best features of the Code 
and of provisions in the existing Ontario and U.K. legislation, or, indeed, 
other sources. 19 We have, however, made every attempt to avoid super- 
imposing, in a mechanical way, Article 2 terminology, concepts and solu- 
tions on the differently worded and conceived Sale of Goods Act pro- 
visions; we were acutely aware that such a marriage might prove disastrous 
and give us the worst of both worlds. 

Apart from stylistic changes, our Draft Bill differs from Article 2 in 
several significant respects, some of which may be briefly mentioned. The 
Draft Bill dispenses with writing requirements as a condition of the en- 
forceability of a contract of sale. 20 It also abolishes, rather than modifies, 
the parol evidence rule. 21 The Code's solution for dealing with conflicting 
writings, the "battle of the forms", has been substantially omitted. 22 The 
Article 2 definition of good faith in the case of merchants has been ex- 
tended to all buyers and sellers. 23 The Draft Bill adopts, 24 with changes, 
the definition of express warranty in section 12 of the Uniform Sales Act 
in preference to the test in UCC 2-313(1) (a), and substitutes a simpler 
regime 25 for Article 2's multiple provisions dealing with the effectiveness 
of disclaimer clauses. In this context, we would mention that the Draft 
Bill's definition of express warranty is wide enough 26 to permit direct 

i7Examples of the former type are UCC 2-502 and 2-702(2), discussed infra at 
chapters 17 and 16. Examples of the latter type are UCC 2-318 (seller's lia- 
bility to third parties for defective goods) and UCC 2-725 (statute of limita- 
tions in contracts for sale). 

18 See, Appendix 1. 

^See, for example, Draft Bill, ss. 5.10, 5.13. The principal sources of our draft 
provisions are indicated at the end of each section. 

20However, this does not preclude the parties from introducing their own writing 
requirements; for example, with respect to binding modifications of the con- 
tract: See, Draft Bill, s. 4.8(2). 

2iDraft Bill, s. 4.6. 

22 Infra, ch. 5. 

23Draft Bill, s. 3.2 and 1.1(1) 15. 

24Draft Bill, s. 5.10. 

25DraftBill, ss. 5.16, 5.2(5). 

26Draft Bill, s. 5.10. 



29 

action against a manufacturer or other distributor for breach of an express 
warranty given by him to the ultimate buyer, whether or not there is pri- 
vity of contract between the parties. The Bill does not, however, attempt 
to introduce a general regime of manufacturer's liability for defective 
products. Instead it confers 27 a form of subrogated right on a subsequent 
buyer for breach of warranty by a prior seller and leaves general products 
liability problems to be dealt with by other means. 28 

The interrelationship between Article 2 and the Draft Bill deserves 
further comment. The provisions in Part VI of the Draft Bill dealing with 
the power of a seller, in stated circumstances, to confer a better title on 
his buyer than he himself has, are a synthesis of Article 2 and existing 
Ontario law, but go beyond both in several significant respects. 29 The Draft 
Bill rejects the perfect tender rule contained in Article 2 and the excep- 
tions thereto. It adopts in their place a unified conceptual framework, 30 
applicable to breaches by seller and buyer, in which the remedies turn on 
whether or not the breach amounts to a substantial breach of the con- 
tract. 31 Finally, the Bill retains Article 2's concept 32 of the seller's right 
to cure a breach where it is reasonable to allow him to do so, but ex- 
presses it in substantially different language. 33 The Draft Bill also departs 
from Article 2 in permitting an aggrieved seller or buyer, in defined cir- 
cumstances, to demand cure from the party in default and to treat failure 
to cure as amounting to a substantial breach, whether or not the original 
breach could have been characterized in this manner. 34 The reasons for 
these and other departures will be explained in later parts of this Report. 

4. Aids To Interpreting The Revised Act 

In view of the many differences between the existing Act and the 
Draft Bill that we are recommending for adoption, the Commission has 
given anxious consideration to the question whether the courts should be 
permitted to resort to extrinsic aids for the purpose of interpreting the 
proposed revised Act. We are evenly divided on the question. The present 
rule is 35 that, in general, the courts are not at liberty to go behind an Act 
for the purpose of construing its language and, in the view of some mem- 
bers of the Commission, this salutary principle should not be relaxed. The 
Commissioners who are of this opinion are concerned about creating a 
dangerous precedent, and about the impact that the admissibility of ex- 
trinsic evidence would have on the length of trials and the quality of statu- 
tory draftsmanship. 



27Draft Bill, s. 5.18. 

28/n/ra, ch. 10. 

WInfra, ch. 12. 

30Draft Bill, ss. 9.3, 9.12, 1.1(1)24. 

^"Substantial breach" is defined in s. 1.1(1)24 of the Draft Bill. 

3 2See, UCC 2-508. 

33See, Draft Bill, s. 7.7. 

34Draft Bill, ss. 7.7(4) and (5), 9.4(1). 

ttCraies on Statute Law (7th ed., 1971), pp. 128-31. The question has also been 
discussed on a number of recent occasions by the Uniform Law Conference 
of Canada: See, Proceedings of 59th Annual Meeting (August, 1977), pp. 30, 
325, et seq., and earlier reports referred to therein. 



30 

The other Commissioners believe that a modest relaxation of the 
rule can be amply justified in the present case. They support the insertion 
in the Draft Bill of a provision along the following lines: 

In construing the provisions of this Act regard may be had to its 
legislative history and to any official report made to the Government 
or Legislature of Ontario. 

It will be noted that this proposal falls markedly short of permitting the 
admission of every form of extrinsic aid. The argument in support of such 
a provision may be stated briefly. Should the Commission's recommenda- 
tions be accepted, the close connection between Article 2 and the revised 
Act will be common knowledge. It would be anomalous if counsel, in 
arguing a point of construction of the revised Act, were permitted to refer 
to American sources but denied the opportunity to refer to the best pos- 
sible evidence of the reasoning behind its many provisions. 

As we have stated, the Commission is evenly divided on this issue 
and we therefore make no recommendation with respect to it one way or 
the other. 

5. Retaining Uniformity With The Common Law Provinces 

If additional evidence were needed, the CM. A. results would clearly 
show 36 the importance of interprovincial sales for Ontario's economy. It 
would be unfortunate if the adoption of a revised Act were to create unin- 
tended impediments to the free flow of goods between the provinces. As 
has been previously noted, 37 the Uniform Law Conference has played an 
active role in sponsoring the drafting of uniform acts in other branches 
of commercial law, and we would urge its early involvement to explore 
the possibility of securing the adoption of a revised Uniform Sale of Goods 
Act. 

6. Greater Harmonization Between The Laws of Ontario 
and Quebec 

As the earlier resume has shown, there are substantial differences 
between the sales law of Quebec and the sales law of Ontario. Some of 
the differences may be resolved as a result of the changes contemplated 
in the revised Civil Code and the changes in the Ontario law recom- 
mended in this Report. But significant differences are likely to remain, 
notwithstanding the revision of the domestic sales law in the two juris- 
dictions. Even under the most favourable conditions it would be unreal- 
istic to aim for the total harmonization of the sales law of two provinces 
whose private law systems differ in fundamental respects. However, we 
see no harm and, indeed, potential good in consultations between the two 
governments with a view to determining how troublesome differences can 



36 51.9% of the respondents have sales offices in other provinces, 65% purchase 
raw materials from other provinces, and 36.9% sell in excess of 40% of their 
goods to other provinces. Only 10.2% reported no sales in other provinces: 
See, Research Paper No. 1.1, questions 9, 10, 11 and 13; Fisher, Research 
Paper No. 1.2, pp. 4, 8, 9, 13. 

^ Supra, ch. 2, p. 10. 



31 

best be resolved and greater harmonization secured in the applicable rules 
governing interprovincial sales transactions between their residents. 38 

7. Should Ontario Adopt A Commercial Code Along The 
American Model? 

This question falls outside the strict terms of reference of the present 
Project, but is so intimately related to it that it warrants at least some pre- 
liminary observations. It is obvious that commercial law statutes such as 
The Factors Act, 39 The Mercantile Law Amendment Act, 40 and The 
Warehouse Receipts Act 41 should be reviewed at an early opportunity 
with a view to updating them and ensuring their consistency with the 
revised Sale of Goods Act. However, this does not answer the wider 
question whether Ontario should aim for a Commercial Code along the 
American model. 

We are not ready to commit ourselves to a firm view at this junc- 
ture, but we believe the question should be seriously considered upon 
completion of the revision of the Sale of Goods Act, if not indeed before. 
Several factors militate in favour of such a step. In the first place, Ontario 
has already been strongly influenced by two Articles of the Uniform Com- 
mercial Code, Articles 8 and 9. 42 If the influence of Article 2 on the re- 
vised Sale of Goods Act is as substantial as this Report envisages, this 
number will be increased to three. Secondly, the law of documents of 
title in Ontario is in a state of considerable confusion and in need of 
clarification and modernization. 43 Article 7 of the Uniform Commercial 
Code might well serve as a prototype for the revision of this branch of 
commercial law. Finally, the existence of disparate commercial Acts, how- 
ever admirable the Acts may be in their own right, always creates the 
danger of inconsistencies and overlapping in their treatment of common 
issues. To a considerable extent this problem already exists. The integra- 
tion of the several Acts in a single Code would reduce this danger and 
make the law more accessible and, it is to be hoped, more certain. 

It is appreciated that the subject matter of several important Articles 
in the Uniform Commercial Code, Articles 3, 4 and 5, falls in Canada 
primarily within federal jurisdiction. This suggests the desirability of a 
joint federal and provincial project in which the two levels of govern- 
ment would pool their constitutional powers to produce a harmonious 
body of commercial law. In our view such a venture would make good 
sense. Absent this cooperation, a "mini-Commercial Code" that would 
embrace the areas of sales, bulk sales, documents of title, investment sec- 



38The desirability of uniform legislation between Quebec and Ontario was also 
stressed in a letter to the Director of the Research Project by M. Emile Colas, 
c.r., a distinguished Montreal practitioner. M. Colas was responding to the 
Commission's news release announcing the Project. 

39R.S.O. 1970, c. 156 as am. 

40R.S.O. 1970, c. 272 as am. 

41 R.S.O. 1970, c. 489 as am. 

42 See, The Business Corporations Act, R.S.O. 1970, c. 53 as am., ss. 63 et seq., 
and The Personal Property Security Act, R.S.O. 1970, c. 344 as am. 

43 See Baer, Research Paper No. IV.3. 



32 

urities, and secured transactions, would be a significant step in the pro- 
gressive development of Ontario commercial law. 

8. A Law Of Contract Amendment Act 

Sales law is merely a specialized aspect of the law of contract; if the 
basic contract rules fail to keep abreast of changing needs, the quality of 
the sales law will also be affected. This was clearly recognized by the 
draftsmen of Article 2 who, as previously noted, introduced a substantial 
number of contract provisions designed to clarify or improve existing 
contract rules. It was for similar reasons that the Commission agreed that 
the list of matters to be researched should include papers 44 on the follow- 
ing topics: namely, the law of consideration; assignment of contracts and 
delegation of duties; mistake; contracts for the benefit of third parties; the 
law of anticipatory repudiation; and, frustration. The conclusions reached 
by the authors of these papers and by the Commission are referred to in 
later chapters in this Report. 

It will be appreciated that the changes in the existing law recom- 
mended in these research papers, and, indeed, some of the changes recom- 
mended in other research papers, ought not to be confined to the revised 
Sale of Goods Act, but should be introduced generally in the law of con- 
tract. The Commission intends, once its work on the Sale of Goods Pro- 
ject is completed, to undertake a Law of Contract Amendment Project, 
which will examine those rules of general contract law that require re- 
form. So far as the present Sales Project is concerned, we have incorpor- 
ated in the Draft Bill changes in general contractual principles that have a 
particular bearing on sales law; where appropriate, similar changes will 
be incorporated in our proposed Law of Contract Amendment Act. 
Changes that are of only secondary importance in a sales context, or that 
require a fundamental recasting of basic contract doctrines, have been 
remitted exclusively to the proposed Law of Contract Amendment Act. 

RECOMMENDATIONS 

The Commission makes the following recommendations: 

1. Ontario should adopt a revised Sale of Goods Act that borrows 
heavily from Article 2 of the American Uniform Commercial 
Code but is not simply a copy of this Article. 

2. The Uniform Law Conference of Canada should be asked to ex- 
plore the possibility of a revised Uniform Sale of Goods Act. 

3. Contact should also be established with the Quebec government 
with a view to promoting greater harmonization between the sales 
laws of Ontario and Quebec. 

4. Related Ontario commercial legislation should be reviewed with 
a view to updating such legislation and ensuring its consistency 
with the revised Sale of Goods Act. 



44See Research Papers Nos. II.2, II.6, II.7, II.8, III.8 and III.8a, listed in Ap- 
pendix 8. 



33 

5. The desirability of an Ontario Commercial Code should be con- 
sidered. 

6. As in the case of Article 2, desirable changes in general contract 
law that have a particular bearing on sales law should be in- 
corporated in the revised Sale of Goods Act; other desirable 
changes in contract law should be remitted exclusively to a Law 
of Contract Amendment Act. 



PART II 



[35] 



CHAPTER 4 



SCOPE OF THE SALE OF GOODS ACT 
AND DEFINITION OF SALE 



1. Introduction 

The Sale of Goods Act applies only to transactions that are "con- 
tracts of sale", as defined by the Act. Section 2(1) of The Sale of Goods 
Act defines a "contract 1 of sale of goods" as "a contract whereby the 
seller transfers or agrees to transfer the property in goods to the buyer for 
a money consideration called the price". "Seller", "property", "goods", 
and "buyer" are separately defined in section 1. As might be expected, 
these definitions have spawned a generous quota of litigation. In particu- 
lar, the courts have experienced difficulty in distinguishing between con- 
tracts of sale of goods and related types of transactions. 

Many of the earlier cases were concerned with the applicability to 
the contract in question of the evidentiary requirements in section 17 of 
the Statute of Frauds, 1677, 2 now section 5 of the Ontario Act. 3 Later in 
this Report we recommend elimination of this section in the revised Act 
and, to this extent, if our recommendation is adopted, one may anticipate 
a modest abatement in the case law turning on the distinction between con- 
tracts of sale and near-sale type transactions. In other areas, the courts 
have bridged the gap by assimilating sales and non-sales rules, wholly or 
in part, and this healthy movement may be expected to continue. But 
even after allowing for these developments, the distinction between sales 
and non-sales transactions remains important and therefore requires ex- 
amination. 



!The Uniform Commercial Code distinguishes between an "agreement" and a 
"contract". An "agreement" is defined inter alia as "the bargain of the parties 
in fact as found in their language or by implication from other circumstances 
including course of dealing or usage of trade or course of performance as pro- 
vided in this Act" [UCC 1-201(3)]. "Contract" is defined as meaning "the total 
legal obligation which results from the parties' agreement as affected by this 
Act and any other applicable rules of law" [UCC 1-201(11)]. The termino- 
logical distinction, though frequently not observed in practice, is juristically 
sound and we have followed it in the Draft Bill: see s. 1.1(1). 
229 Car. 2, c. 3 (part) (U.K.), as amended by 9 Geo. 4, c. 14 (U.K.), s. 7. 
3 Section 5 of The Sale of Goods Act provides: 

5.-(l) A contract for the sale of goods of the value of $40 or more is 
not enforceable by action unless the buyer accepts part of the goods so sold 
and actually receives them, or gives something in earnest to bind the con- 
tract or in part payment, or unless some note or memorandum in writing 
of the contract is made and signed by the party to be charged or his agent 
in that behalf. 

(2) This section applies to every such contract notwithstanding that the 
goods may be intended to be delivered at some future time, or may not at 
the time of the contract be actually made, procured, or provided, or fit or 
ready for delivery, or some act may be requisite for the making or com- 
pleting thereof, or rendering them fit for delivery. 

(3) There is an acceptance of goods within the meaning of this section 
when the buyer does any act in relation to the goods that recognizes a pre- 
existing contract of sale, whether there is an acceptance in performance of 
the contract or not. 

[37] 



38 

The present chapter focuses attention on four principal issues: name- 
ly, (1) the character of the parties to the agreement; (2) the character of 
the agreement; (3) the meaning of "goods"; and (4) the meaning of 
"price". A concluding section considers briefly whether the revised Act 
should deal specifically with near-sale transactions, or whether the Act 
should include a general provision encouraging the courts to apply the 
sales solution by analogy where the underlying issues are identical or 
similar in nature. 

2. The Character Of The Parties To The Agreement 

In general, the Ontario Sale of Goods Act, like the common law 
upon which it is based, does not distinguish between different types of 
buyers and sellers. For most purposes, the same rules are applied without 
regard to the character of the parties or the commercial or non-commercial 
nature of the transaction. In this respect the common law differs signifi- 
cantly from such civil law systems as the German and the French or, in- 
deed, from the law of Quebec, in which the characterization of a trans- 
action as commercial or civil entails important procedural as well as sub- 
stantive consequences. 4 Like the common law, the present Act does attach 
significance to the character of the parties in one respect: namely, in the 
recognition of the concept of a merchant, in the sense of a person who 
sells goods in the course of his business. Merchants fall into a separate 
category, but only in the context of the implied conditions of fitness and 
merchantability. 5 A question worthy of consideration is whether the dis- 
tinction between merchants and non-merchants should be applied to other 
parts of sales law. 

Article 2 has made a modest beginning in this direction. "Merchant" 
as defined in UCC 2-104 embraces three types of person: (a) a person 
who deals in goods of the kind involved in the transaction; (b) a person 
who by his occupation holds himself out as having knowledge or skill 
peculiar to the practices or goods involved in the transaction; or, (c) a 
person to whom such knowledge or skill may be attributed by his em- 
ployment of an agent or broker or other intermediary who, by his occupa- 
tion, holds himself out as having such knowledge or skill. 

The "merchant" concept is applied by Article 2 in three groups of 
situations. 6 It applies, first of all, to all businesses, including professional 
persons and institutions such as universities, at various phases in the 
formation and readjustment of the sales contract. 7 Secondly, it is applied 
in the more restricted sense of a person dealing in goods of the kind in- 
volved in the particular transaction, to determine the following questions: 
the applicability of the implied warranty of merchantability; 8 the rights 
of creditors with respect to goods left in the hands of a merchant-seller; 9 



4 See, NYLRC Study, ch. 2, footnote 69, supra, Pt. Ill, pp. (87) ct scq., espe- 
cially ch. II. 
5 See, section 15. 
6See, UCC 2-104, Comment 2. 
7UCC 2-201(2), 2-205, 2-207(2) and 2-209(2). 
8UCC 2-314. 
9TJCC 2-402(2). 



39 

and, the effect of entrusting possession of goods to a merchant who dis- 
poses of the goods in the ordinary course of business. 10 Finally, in a third 
group of cases, the concept is applied to merchants who satisfy either the 
"goods" or the "practices" aspect of the definition of merchant. This third 
group includes the enlarged duty to act in good faith enshrined in UCC 
2-103(1) (b); the merchant-buyer's duties with respect to rejected goods 
or goods not accepted under a sale on approval; 11 risk of loss in the 
absence of breach; 12 and, the parties' entitlement to adequate assurance 
of performance. 13 It will be noted that, in general, the Code provisions do 
not establish separate merchant standards with respect to the performance 
of the parties' obligations or the remedies available to them in the event of 
a breach. The one important exception involves the higher standard of 
good faith conduct expected of a merchant. 14 

We support the Code's approach and have adopted it, with modi- 
fications, in the Draft Bill. 15 We recognize that there may be borderline 
cases in which it may not be easy to determine whether or not a party is a 
merchant. However, this determination does not appear to have given 
rise to any appreciable problems in the Code jurisdictions, nor in the 
growing number of Ontario statutes in which the applicability of an Act 
or parts thereof turns on the character of the actors. 16 In saying this we 
do not wish to be understood as favouring a pervasive distinction in the 
revised Act between merchant and non-merchant parties; and, even less, 
as favouring the adoption of a separate Act to govern sales by non- 
merchants. In our view, whether or not the distinction is to be applied in 
a particular context should turn on functional considerations, on the pur- 
pose of the rule in question, and on its practical impact on one or other 
category of person. 17 

A separate but related question to the merchant, non-merchant 
dichotomy is the treatment of consumer sales; that is, the sale by a mer- 
chant of goods intended by the buyer for his personal or family use or 
consumption. The Sale of Goods Act provides no separate rules to govern 
such cases. With one exception, 18 the position is the same in Article 2. This 
does not, of course, mean that Ontario has no separate rules regulating 
various facets of consumer sales; it only means that the provisions have 
not been incorporated in The Sale of Goods Act. As we have previously 
noted, during the past decade Ontario, in common with most of the other 

10UCC 2-403(2). 

"UCC 2-327(1) (c), 2-603 and 2-605. 

i2UCC 2-509. 

!3UCC 2-609. 

HTJCC 2-103(1) (b). See, further, infra, ch. 7. 

15 See, s. 1.1(1)18. 

16 See, for example, The Consumer Protection Act, R.S.O. 1970, c. 82 as am., 
s. l(s), definition of "seller"; The Factors Act, R.S.O. 1970, c. 156, ss. 1(c) 
and 2; and, The Personal Property Security Act, R.S.O. 1970, c. 344 as am., 
s. 30. 

^Problems of classification are common to many legal systems. For a recent dis- 
cussion of some of the difficulties, see Hellner, "The Draft of a New Swedish 
Sale of Goods Act", in Acta Universitatis Stockholmiensis Studia Juridica 
Stockholmiensia 58 (1978), also published as part of Scandinavian Studies in 
Law (1978), at pp. 55 et sea. 

!8UCC 2-318. 



40 

provinces, has adopted a substantial volume of consumer protection legis- 
lation that modifies or repeals the rules that would otherwise apply under 
The Sale of Goods Act or at common law. The question that arises is 
whether these provisions should be enlarged and systematized and con- 
verted into a separate consumer sales act to govern all aspects of sales to 
consumers. 

A persuasive case can be made in favour of such a step. However, 
our terms of reference are not specifically directed to this question and, 
while we have considerable sympathy for the concept of a separate con- 
sumer sales act, there appears to be no immediate need for legislation of 
this kind. There will be time enough to consider its desirability after the 
present Sale of Goods Act has been revised. In any event, in our view, if 
the concept of a separate consumer sales act is to be pursued, it should 
be treated as a separate matter. 

3. The Character Of The Agreement 

(a) meaning of "general property" 

It has long been accepted as the essential earmark of a sale that the 
transaction must involve a transfer of the general property in the goods as 
distinct from a more limited interest, such as the special interest of a bailee. 
The definition of "property" in section l(l)(i) of the present Sale of 
Goods Act confirms this position. Section l(l)(i) provides that "'prop- 
erty' means the general property in goods and not merely a special prop- 
erty". This definition creates two difficulties. 19 

In the first place, it is not clear whether the "general property" en- 
visaged by the Act refers to the legal title, or whether a beneficial equit- 
able title or its equivalent will suffice. The distinction is material in the 
context of a conditional sale agreement where the buyer purports to sell 
his "equity" in the goods. The question arises whether the transfer by the 
buyer of his interest is a transfer of the general property and therefore 
governed by The Sale of Goods Act. If the seller's retention of title under 
a conditional sale agreement is viewed merely as the reservation of a sec- 
urity interest — a question that we discuss below — the sale of the inter- 
est acquired by the buyer under the conditional sale should clearly fall 
within The Sale of Goods Act. Likewise, if the buyer disposes of the goods 
without disclosing the outstanding conditional sale agreement, he would, 
on this reasoning, be guilty of a breach of the implied warranty of freedom 
from encumbrances, but not of the implied condition of title. The problem 
is, however, complicated by the broad wording of section 13(a) of The 



19 Other difficulties, which we do not pause to examine here, arise because the 
present Act uses "property" in some sections and "title" in others. On this point 
see, generally, Battersby and Preston, "The Concepts of 'Property', 'Title' and 
'Owner' used in the Sale of Goods Act 1893" (1972), 35 Mod. L. Rev. 268; 
and, see further infra, chapters 11 and 12 with respect to our recommendations 
on the relevance of title in resolving issues between seller and buyer, and the 
circumstances in which a non-owner should be able to transfer a better title to 
chattels than he himself has. 



41 

Sale of Goods Act, 20 and by the absence of authoritative interpretation of 
the meaning of encumbrance for the purposes of section 13(c) of the 
Act. 21 There appear to be few, if any, cases in which this question has been 
directly discussed. 22 However, there are a substantial number of cases 23 
in which a person selling goods that were subject to a prior undisclosed 
conditional sale agreement has been held guilty of breach of the condi- 
tion of title under section 13(a), or of an express provision in the con- 
tract to the same effect, and not simply of breach of the warranty of free- 
dom from encumbrances under section 13(c). The inference, therefore, is 
that the "general property" envisaged in section l(l)(i) must be of a 
legal character or, at any rate, that the interest of a conditional buyer, 
however it is characterized, is not the general property predicated by The 
Sale of Goods Act. 

The distinction is of considerable significance under existing law, 
because breach of the condition of title permits the innocent purchaser to 
reject the goods and sue for the return of his payments, 24 whereas inter- 
ference with his possessory rights only amounts to a breach of warranty 
and his remedy is limited to a claim in damages. The Commission's Report 
on Consumer Warranties and Guarantees in the Sale of Goods recom- 
mended the abolition of the distinction between warranties and conditions 



20 Section 13 of The Sale of Goods Act provides: 

13. In a contract of sale, unless the circumstances of the contract are 
such as to show a different intention, there is, 

(a) an implied condition on the part of the seller than [sic] in the 
case of a sale he has a right to sell the goods, and that in the case 
of an agreement to sell he will have a right to sell the goods at 
the time when the property is to pass; 

(b) an implied warranty that the buyer will have and enjoy quiet pos- 
session of the goods; and 

(c) an implied warranty that the goods will be free from any charge 
or encumbrance in favour of any third party, not declared or 
known to the buyer before or at the time when the contract is 
made. 

On the meaning of "a right to sell the goods" in s. 13(a), see Niblett v. Con- 
fectioners' Materials Co., Ltd., [1921] 3 K.B. 387 (C.A.), foll'd in Egekvist 
Bakeries v. Tizel & Blinick, [1950] 1 D.L.R. 585, aff'd [1950] 2 D.L.R. 592 
(Ont. C.A.). 

21 See, infra, ch. 9, sec. 1. 

22I n R. v. Hemingway, [1955] S.C.R. 712, 1 D.L.R. (2d) 34, the issue was 
whether the conditional buyer acquired any property interest for the purposes 
of an information charging him with obtaining goods under false pretences. The 
question was answered affirmatively, but the precise character of the buyer's in- 
terest was not spelled out. See also, Delta Acceptance Corp. Ltd. v. Redman, 
[1966] 2 O.R. 35, 55 D.L.R. (2d) 481 (Ont. C.A.), in which Laskin, J.A., in 
his dissenting judgment, analogizes the position of a conditional buyer with that 
of a mortgagor. Once again, however, the issue before the Court did not involve 
The Sale of Goods Act. 

23For example, Sloan v. Empire Motors Ltd. (1956), 3 D.L.R. (2d) 53 
(B.C.C.A.); Fisher v. Campbell (1960), 25 D.L.R. (2d) 774 (B.C.C.A.); 
and, McNeill v. Assoc. Car Markets Ltd. (1962), 35 D.L.R. (2d) 581 
(B.C.C.A.). For the position in England with respect to hire-purchase agree- 
ments, see Karflex Ltd. v. Poole, [1933] 2 K.B. 251 and War man v. Southern 
Counties Car Finance Corp. Ltd., [1949] 2 K.B. 576. 

^Rowland v. Divall, [1923] 2 K.B. 500 (C.A.). 



42 

for the purpose of consumer sales, 25 and a similar recommendation is 
made in chapter 6 of the present Report with respect to other sales. If 
these recommendations are implemented, it may no longer matter whether 
the breach involves a breach of the implied term of title or a breach of the 
implied terms of quiet possession or freedom from encumbrances. 

Nevertheless, we think it desirable to clarify the nature of a condition- 
al buyer's interest for other purposes and, in so doing, we have followed 
the route of Article 2. Accordingly, in the Draft Bill, a "contract of sale" 
is no longer defined in terms of general property. Rather, following the 
example of UCC 2-106, "contract of sale" is defined to mean "a contract 
whereby the seller transfers or agrees to transfer the title in goods to the 
buyer for a price . . .". 26 "Title" is not defined. However, as in UCC 
2-40 1, 27 the Draft Bill also provides, in dealing with the time and manner 
of passing of title, that "any reservation by the seller of the title in goods 
shipped or delivered to the buyer is limited to the reservation of a security 
interest". 28 It seems to us that this, in conjunction with the general effect 
of The Personal Property Security Act, should be sufficient to make it 
clear that the buyer in a conditional sale agreement acquires the beneficial 
title in the goods and should be in a position to transfer it to others, sub- 
ject to the seller's security interest, and subject also to the effect of any 
restrictions in the original security agreement on the transfer of the buyer's 
interest. 29 

There is a second difficulty arising from the definition of "contract of 
sale" in section 2(1) of The Sale of Goods Act. The requirement, imposed 
by the combined operation of sections 2(1) and 1(1) (i) of the Act, that 
the seller must agree to transfer the general property in goods, invites the 
inference that an agreement that merely transfers the seller's interest in 
the goods, whatever its quality, or that successfully excludes the implied 
condition of title, is not a "sale" within the meaning of the Act. Although 
this is a logical conclusion, it is opposed both to the common law history 
of the condition of title and to the wording of section 13. 30 The latter 
section clearly envisages the possibility that the seller may successfully 
exclude his title obligations, and where he has done so he can no longer 
be said to have agreed to transfer the general property in the goods: his 
commitment is limited to transferring the title if, in fact, he has title. The 
point is a fine one, but it has caused controversy among commentators. 31 



25 Ontario Law Reform Commission, Report on Consumer Warranties and Guar- 
antees in the Sale of Goods (1972), p. 44. 

2 6See, section 1.1(1)8. 

27IJCC 2-401(1), 2nd sent. See also UCC 2-505, which particularizes the general 
rule in the case of documents of title issued in the seller's name. 

28 See, section 6.1 (2) (b), and compare section 5.12(1) (b). "Security interest" is 
defined in section 1.1(1) 21 as "an interest in personal property, including 
goods, that secures payment or performance of an obligation". 

29Compare, The Personal Property Security Act, R.S.O. 1970, c. 344 as am., s. 33. 

3°Supra, footnote 20. See further infra, ch. 9, sec. 1, and compare, Fridman, 
Sale of Goods in Canada (1973), pp. 109-10, and Greig, Sale of Goods 
(1974), pp. 15-16. 

31 See, for example, Hudson, "The Condition as to Title in Sale of Goods" (1957), 
20 Mod. L. Rev. 236, and Reynolds, "Warranty, Condition and Fundamental 
Term" (1963), 79 L.Q. Rev. 534, 542. 



43 

We therefore think it desirable to make it clear that the type of transac- 
tion here discussed is a "sale" within the meaning of The Sale of Goods 
Act. We have sought to accomplish this objective by defining "contract of 
sale" in the Draft Bill to include contracts to which the provisions on the 
implied warranty of qualified title and the permissibility of disclaimer 
clauses apply. 32 

(b) SALE INCIDENTS IN CONDITIONAL SALE AGREEMENTS 

A conditional sale agreement involves a present transfer of possession 
to the buyer, but a retention of title by the seller by way of security until 
the purchase price is paid. It should be distinguished from a transfer of 
title in goods by way of security only; that is, a chattel mortgage. It has 
long been settled that such a transfer is not a sale, and this position is con- 
firmed in section 57(3) of The Sale of Goods Act. 33 

A conditional sale agreement may be characterized in one of two 
ways. Under the first characterization, it is viewed as an executory agree- 
ment of sale and thus would clearly fall within the description of an agree- 
ment to sell in section 2(3) of The Sale of Goods Act. According to the 
second characterization, upon delivery of the goods to the buyer there is a 
completed sale in all respects and the buyer has a legal interest in the goods 
which ripens into unencumbered ownership upon completion of his pay- 
ments. 34 In the meantime the seller retains title, but only by way of secur- 
ity. The transaction is deemed to have the same effect as if there had been 
an outright transfer of title to the buyer, followed by a retransfer to the 
seller to provide him with his security; in other words, a short form of 
chattel mortgage. Once again, therefore, there should be no doubt that 
the sale incidents of the agreement are governed by The Sale of Goods Act. 

Canadian jurisprudence has long been divided between these two 
characterizations, 35 with the majority of courts favouring the former. In 
Ontario, the uncertainty should be dispelled as a result of the adoption of 
The Personal Property Security Act, since the Act explicitly assimilates 
conditional sale agreements with other forms of chattel security agree- 
ments. 36 Under either characterization the great majority of Canadian 
courts have never shown much hesitation in applying the usual sales rules 
to regulate the sale incidents of the transaction. This observation is sub- 
ject to two qualifications. 

The first involves a number of early Ontario cases 37 in which the 
courts doubted whether a buyer under a conditional sale agreement, who 



32See, Draft Bill, s. 1.1(1)8. 
33 Section 57(3) provides: 

The provisions of this Act relating to contracts of sale do not apply to any 
transaction in the form of a contract of sale that is intended to operate by 
way of mortgage, pledge, charge or other security. 
34 Compare, Void, "The Divided Property Interest in Conditional Sales" (1930), 

78 U. Pa. L. Rev. 713, and Williston on Sales (Rev. ed., 1948), sec. 330. 
35 See, Goode and Ziegel, Hire-Purchase and Conditional Sale (1965), chapter 14. 
36 See, The Personal Property Security Act, R.S.O. 1970, c. 344 as am., s. 2(a). 
3 ?For example, Frye v. Milligan (1885), 10 O.R. 509 (H.C.J.); Tomlinson v. 
Morris (1886), 12 O.R. 311 (H.C.J.) ; New Hamburg Mfg. Co. v. Webb 
(1911), 23 O.L.R. 44 (H.C.J.). 



44 

had not yet paid the full price, was entitled to claim the usual measure of 
damages for breach of warranty. The courts were troubled by the thought 
that the buyer might lose the goods because of nonpayment, and held that 
the damage award should take this possibility into consideration. The short 
answer to this reasoning, surely, is that the possibility is too conjectural in 
character, and that it does not lie in the mouth of the defaulting seller to 
speculate about an event that has not occurred. 

The second qualification may be found in the admittedly ambiguous 
judgment of Hall, J. A., in the decision of the Saskatchewan Court of 
Appeal in Kozak v. Ford Motor Credit Co. 38 This judgment leaves the 
inference that conditional sale agreements may be altogether excluded 
from The Sale of Goods Act. If this is a correct interpretation of the posi- 
tion of Hall, J. A., it is opposed by the great weight of earlier jurisprudence 
and would create numerous difficulties. Ontario's former Conditional Sales 
Act did not purport to regulate the sales aspects of a conditional sale 
agreement, and this is also the case under the present Personal Property 
Security Act. There does not appear to be any good reason why such 
statutes should intrude into sales law; indeed, section 17 of The Personal 
Property Security Act expressly provides the contrary. 39 

Ill-founded though they may be, it seems desirable to resolve in the 
revised Act any doubts as to whether the sales incidents of a conditional 
sale agreement are governed by The Sale of Goods Act. Our Draft Bill, 
therefore, specifically includes within the definition of "contract of sale" a 
"contract in which the seller is to retain a security interest in the goods". 40 
To place the matter beyond doubt, we have also inserted in the Draft Bill 
a provision to the effect that the Act shall not apply to any transaction 
which, whether or not it is in the form of an unconditional contract to sell 
or present sale, is intended to operate only as a secured 'transaction. 41 The 
word "only" would make it clear that the sales incidents in a conditional 
sale agreement will be governed by the revised Sale of Goods Act. 

(c) SALE OF A PART INTEREST 

The concluding clause of section 2(1 ) of The Sale of Goods Act pro- 
vides that "there may be a contract of sale between one part owner and 
another". In our opinion, this formulation is too narrow and does not 
adequately reflect either long established usage in the North American 
commodities trade, or commercial needs. The clause recognizes that a sale 
between co-owners falls within the Act, but fails to allude to the position 
involving the sale of a part interest, including the sale of a part interest 



38[1971] 3 W.W.R. 1, 18 D.L.R. (3d) 735 (Sask. C.A.). (Maguire, J.A., con- 
curred with Hall, J. A.). 
39 Section 17 of The Personal Property Security Act provides as follows: 
17. Where a seller retains a purchase-money security interest in goods, 

(a) The Sale of Goods Act governs the sale and any disclaimer, limitation or 
modification of the seller's conditions and warranties; and 

(b) except as provided in section 16, the conditions and warranties in a sale 
agreement shall not be affected by any security agreement. 

40See, Draft Bill, s. l.l(l)8(b). 
4iSee, Draft Bill, s. 2.2(2). 



45 

in identified fungible goods, to a buyer who has no existing interest in the 
goods. The status of a contract for the sale of a specified quantity from a 
larger mass is of particular importance, since grain and other fungibles 
that are held in common storage for their owners by a warehouseman are 
sold daily "to an enormous amount". 42 Nevertheless, the English rule 
still appears to be that no property in the goods passes to the buyer until 
they have been separated from the larger mass. 43 The Ontario position is 
unclear. However, in Inglis v. Richardson, 44 which was decided before 
Ontario adopted the U.K. Sale of Goods Act, 1893, the Appellate Divi- 
sion noted, without disapproval, 45 the Massachussetts and, indeed, major- 
ity American rule. 46 This rule holds that the parties, if they so intend, can 
create a tenancy in common with respect to the buyer's interest in the 
larger mass, and that prior severance is not essential. 

This rule was adopted in section 6 of the Unform Sales Act and has 
been reproduced in section 2-105(3) and (4) of the Uniform Commercial 
Code as follows: 

(3) There may be a sale of a part interest in existing identified goods. 

(4) An undivided share in an identified bulk of fungible goods is 
sufficiently identified to be sold although the quantity of the bulk is 
not determined. Any agreed proportion of such a bulk or any quant- 
ity thereof agreed upon by number, weight or other measure may 
to the extent of the seller's interest in the bulk be sold to the buyer 
who then becomes an owner in common. 

"Fungible" is defined in section 1-201(17) of the Code as meaning, inter 
alia, goods "of which any unit is, by nature or usage of trade, the equival- 
ent of any other like unit". We agree with Williston 47 that the English rule 
is anomalous, and we recommend the adoption in the revised Act of pro- 
visions comparable to those in the Code together with a definition of 
fungible goods. 48 

(d) CONTRACTS OF SALE AND CONTRACTS FOR WORK AND MATERIALS 

The distinction between these two types of contract is a familiar one 
and has been a fertile source of litigation. 49 The reason is that The Sale 
of Goods Act does not apply to a contract for work and materials. In 
speaking of such contracts, it is desirable to distinguish between two 
possible situations. Each situation includes elements of work and materials. 
In the first case, the labour and skill are incorporated in the production 
of the finished chattel. In the second, however, labour or services are 
provided in addition to materials, although they constitute part of the 



42See, Williston on Sales (Rev. ed., 1948), Vol. 1, sec. 155. 

^Benjamin's Sale of Goods (1974), para. 345. 

44(1913), 29 O.L.R. 229 (App. Div.). 

Wbid., at pp. 242-43. 

460n this point, see Williston, footnote 42 supra, sees. 155-57. 

4 l Supra, footnote 42, p. 403, sec. 150. 

48See, Draft Bill, ss. 1.1(1)14, and 2.4(4) and (5). 

49The case law is reviewed in Benjamin, footnote 43 supra, paras. 34-40, and by 

Samek, "Contracts for Work and Materials and the Concept of Sale" (1962), 

36 A.L.J. 66. 



46 

same contract; the concept of incorporation is absent. In both types of 
case the question is one of characterization of the contract. 

So far as the first type of contract is concerned, for example, a con- 
tract to paint a portrait, the contest is between a 'property' test on the one 
hand, and a 'relative value' or 'essential character' test on the other. The 
property test looks to see whether the contractor's labour and skill results 
in a completed chattel, the title in which is to pass to the buyer. If so, it is 
deemed to be a contract of sale. The relative value test measures the com- 
parative worth of the materials and labour, and tilts the scale in favour of 
a contract for work and materials if the value of the labour clearly exceeds 
the value of the materials. This result has also been justified 50 by the so- 
called essential character or substance test. It is reasoned that what the 
customer bargains for in such cases is the skill and labour of the other 
contracting party, and that the supply of materials as part of the finished 
article is only incidental to the main purpose of the contract. It seems rea- 
sonable to assume that the definition of contract of sale in section 2 of The 
Sale of Goods Act reflects the property test as foreshadowed by the well- 
known judgment of Blackburn, J., in Lee v. Griffin. 51 Unfortunately the 
English Court of Appeal reopened the question in Robinson v. Graves, 52 
and adopted what in effect amounts to a relative value test. 53 

The case law is confusing, but the majority of the reported Canadian 
and English cases 54 appear to favour the Blackburn test. In our opinion, 
this is also the sounder test. The relative value test draws an arbitrary and 
untenable distinction between a contract for the purchase of finished goods 
and a contract for an article that is to be made to the buyer's order. The 
essential character test, insofar as it differs from the relative value test, is 
equally open to criticism because it overlooks the fact that "what passes 
to the client is not the materials but the finished [product] , of which both 
the work and the materials are components". 55 Robinson v. Graves has 
left the law in an unsettled state. The Commission therefore recommends 
the adoption of a provision in the revised Act, similar in tenor to article 
6 of the Uniform Law on Sales, 56 but made still more explicit. This pro- 
vision should reaffirm that a contract of sale includes a contract for the 
supply of goods to be manufactured or produced by the seller, whether or 
not the goods are made specially to the buyer's order, and without regard 
to the relative value of the labour and materials involved. 57 It may be 

50See, Robinson v. Graves, [1935] 1 K.B. 579, 587. 
51(1861), 1B.&S. 272, 30 L.J. (Q.B.) 252. 
52 Supra, footnote 50. 

53 See Benjamin, footnote 43 supra, para. 40, p. 32. 

54 For the English cases, see, Benjamin's Sale of Goods (1974), para. 40, n. 89; 
for the Canadian cases, see, for example, The Canada Bank Note Engraving & 
Printing Co. v. The Toronto Railway Co. (1895), 22 O.A.R. 462; R. v. Ha- 
worth, [1920] 2 W.W.R. 1043 (Sask. C.A.); Ross v. Sadofsky, [1943] 1 D.L.R. 
334 (N.S.S.C). 
55 See, Benjamin, supra, para. 40, p. 32. 
56 Article 6 provides as follows: 

Contracts for the supply of goods to be manufactured or produced shall be 
considered to be sales within the meaning of the present Law, unless the 
party who orders the goods undertakes to supply an essential and substan- 
tial part of the materials necessary for such manufacture or production. 
5 7See, Draft Bill, s. l.l(l)8(a). 



47 

thought that this formulation is not apt to describe a contract to paint a 
portrait, or to produce other articles of a highly personalized nature, and 
that such contracts are not normally described as contracts for the "manu- 
facture" or "production" of "goods". We do not believe that there is any 
substance to this objection. As high a degree of skill enters into the pro- 
duction of many modern engineering products as into the painting of a 
portrait, and there has never been much hesitation in characterizing them 
as contracts of sale. The difficulty disappears once it is appreciated that 
The Sale of Goods Act is concerned with the transfer of title to goods of 
every description and not merely those of a commercial nature. 

The second type of contract for work and materials presents greater 
difficulties. A typical example is a contract for the repair of a vehicle in 
which both labour and the replacement of parts are involved. Since labour 
is supplied in addition to the materials, prima facie the contract appears to 
be one of work and materials. It is not clear from the decisional law to 
what extent the relative value test is relevant in such circumstances. Most 
of the cases in which the contract has been characterized as one of work 
and materials 58 involved a substantial element of work, although appar- 
ently no attempt was made to quantify the relative value of the work and 
materials involved. 

With one exception, neither The Sale of Goods Act nor Article 2 has 
attempted to change the common law position. UCC 2-314(1) provides 
that "Under this section the serving for value of food or drink to be con- 
sumed either on the premises or elsewhere is a sale". This provision was 
inserted in order to lay to rest the divided American case law concerning 
a restauranteur's liability for the supply of food unfit for consumption. Its 
restrictive terms have created difficulties, which were apparently unin- 
tended by the draftsmen, and have encouraged some courts to deny war- 
ranty protection in blood transfusion and similar medical cases on the 
ground that no sale was involved. 59 As a result, the American position is 
again unsettled and it would not be wise, in our opinion, to copy the "food 
and drink" clause. 

In considering the desirable response of the revised Act to this 
problem, two points need to be borne in mind. The first is that it is now 
settled law that a person supplying goods under a contract of work and 
materials in the context now discussed is strictly liable for the merchant- 
ability or fitness of the goods supplied by him, even though there has been 
no want of care or skill on his part in procuring the goods. 60 The second, 
and less clear, point is that, so far as the labour component is concerned, 
such a contractor is apparently only held to a standard of reasonable care 
and skill with respect to his own workmanship. 61 

58For example, G. H. Myers & Co. v. Brent Cross Service Co., [1934] 1 K.B. 

46; Dodd & Dodd v. Wilson, [1946] 2 All E.R. 691 (K.B.); De Palma v. 

Runnymede Iron & Steel Co., [1949] O.W.N. 262 (H.C.J.), affd [1950] 

O.R. 1 (C.A.). 
59See, for example, Perlmutter v. Beth David Hospital (1954), 123 N.E. 2d 792 

(N.Y.C.A.). See, further, Honnold, Cases and Materials on the Law of Sales 

and Sales Financing (4th ed., 1976), pp. 145-46. 
WYoung & Marten Ltd. v. McManus Childs Ltd., [1969] 1 A.C. 454 (H.L.). 
^Halsbury's Laws of England (4th ed., 1974), Vol. 2, para. 1568; Sutton, The 

Law of Sale of Goods in Australia and New Zealand (2d ed., 1974), 39. 



48 

On the face of it, it seems anomalous that two standards of responsi- 
bility should be applied to different components of the same contract. The 
anomaly becomes particularly evident when it is borne in mind that hu- 
man skill is just as much involved in the production of a chattel as it is 
in a contract of work and materials. 62 We do not, however, feel called upon 
to justify the distinction. It is sufficient to point out that, if the existing 
law is to be changed with respect to the scope of the implied warranty of 
care and skill in a contract for services or the labour component in a 
contract for work and materials, the change should be effected consistently 
across what would involve an enormous range of activities. Such an am- 
bitious task falls quite outside our terms of reference. 

We are therefore left with several alternatives. One is to continue to 
leave this type of contract to common law development and to say nothing 
about it in the revised Act. A second is to endorse the course of judicial 
development and to provide that in a contract of work and materials the 
contractor shall be subject to the same implied warranties with respect to 
the materials component of the contract as if he had sold the materials 
separately. Such an approach would leave the labour component free for 
further judicial development. A third possibility would be to single out 
particular contracts for special treatment as has been done in UCC 2-314. 
The Commission sees little merit in this last approach and, as has been 
noted, it could encourage false inferences. We therefore favour the second 
solution, and our Draft Bill contains a section to this effect. 63 We do so 
because of the frequency of contracts for work and materials, and the 
importance of establishing a clear chain of liability between the ultimate 
consumer and the person actually responsible for the defective product. 

(e) AGENCY CONTRACTS FOR SALE, CONSIGNMENT CONTRACTS, AND 
CONTRACTS OF SALE OR RETURN 

These types of contract present issues very different from those dis- 
cussed in the previous section. An agency contract for sale involves goods 
entrusted to a person for sale on the owner's behalf; clearly, therefore, 
there is no contract of sale between the parties. A contract of sale or 
return, on the other hand, confers on the recipient an option to retain or 
return the goods, and hence the bailment may ripen into a sale. "Con- 
signment contract" is not a term of art and may describe either an agency 
contract or a contract of sale or return. 64 The Sale of Goods Act touches 
only lightly on contracts of sale or return; 65 Article 2 is a little more 



62 In Young & Marten Ltd. v. McManus Childs Ltd., footnote 60 supra, the con- 
tractor's strict liability for defective materials was justified on the ground that, 
if the customer had no right of recourse against the contractor, he would be left 
remediless since there was no privity between the customer and the person from 
whom the contractor purchased the materials. The contractor, on the other 
hand, could seek his indemnity from the supplier based on breach of the latter's 
implied warranties. 

"See, Draft Bill, s. 5.15(2). 

64Compare, UCC 2-326(3). 

65See, s. 19, Rule 4. 



49 

expansive in its treatment 66 and we have preferred to follow the Code 
route in our Draft Bill. 67 

However, it is not the absence of statutory detail that creates the 
difficult problems in practice. These are twofold and interrelated. The 
first is the difficulty of predicting whether a court will construe a particular 
agreement as being an agency contract for sale or a contract of sale or 
return, a difficulty that is illustrated by such cases as Weiner v. Harris 6 * 
Weiner v. Gill, 69 and Langley v. Kahnert. 10 There is no obvious answer 
to this problem and we offer no cure. The second difficulty arises because 
the rights of third parties, dealing in good faith with the person to whom 
the goods have been entrusted, may vary under the existing law depending 
on how the contract of entrustment is characterized. This problem is 
susceptible of cure, and is discussed in chapter 12 of this Report 
dealing with the nemo dat doctrine. There the conclusion is reached that, 
to the extent that external appearances are the same, a common set of 
rules should be applied. It should be noted, however, that the adoption 
of this recommendation will not change the inherent character of agency 
contracts of sale, or contracts of sale or return; nor will it make these 
contracts subject to sales rules that would not otherwise be applied. 

(f) CONTRACTS OF BAILMENT, EQUIPMENT LEASES AND 
HIRE-PURCHASE AGREEMENTS 

For a variety of reasons, the congeries of agreements generically 
described as chattel leases or equipment leases have grown very rapidly 
in importance since World War II and, predictably, some troublesome 
legal problems have emerged. 71 Three questions predominate. The first is 
to determine how genuine equipment leases are to be distinguished from 
disguised conditional sales. The second is to what extent the implied 
warranties in the revised Sale of Goods Act, or some of them, should be 
extended to include true chattel leases. The third question involves the 
measurement of damages where the lessee has breached his agreement 
and the lessor has repossessed the equipment. 

We begin with the issue of characterization. To appreciate the extent 
to which equipment leases may only be disguised conditional sales, it is 
necessary to distinguish between the following types of agreement: 

(1) Agreements in which the lessor or owner contracts that, if the 



66See, UCC 2-326, 2-327. 

67See, Draft Bill s. 5.26. 

68[1910] 1 K.B. 285. 

69[1906] 2 K.B. 574 (C.A.), affirming [1905] 2 K.B. 172. 

70(1905), 36S.C.R. 397. 

71 The literature is voluminous. See, inter alia, Coogan, "Leases of Equipment and 
Some Other Unconventional Security Devices: An Analysis of UCC Section 
1-201(37) and Article 9", [1937] Duke L.J. 909; Hawkland, "The Impact of the 
Uniform Commercial Code on Equipment Leasing", [1973] U. 111. L. Forum 
446; Leary, "Leasing and Other Techniques of Financing Equipment under the 
U.C.C." (1969), 42 Temple L.Q. 217; Peden, "The Treatment of Equipment 
Leases as Security Agreements under the Uniform Commercial Code" (1971), 
13 Wm. & Mary L. Rev. 110; and, Goode and Ziegel, footnote 35 supra, espe- 
cially ch. 14. 



50 

lessee pays a stipulated rent for a stated period, the chattel is 
to become the property of the lessee at the end of the rental 
period. In the alternative the agreement may provide that, at 
the end of the rental period, the lessor will transfer the prop- 
erty in the leased goods to the lessee or execute a bill of sale 
in the lessee's favour. 

(2) Agreements in which the lessee promises to pay a sum in ren- 
tals equivalent to the purchase price of the chattel and is given 
the option of becoming its owner at the end of the rental period, 
either on tendering the last instalment or on paying an addi- 
tional sum of a nominal amount. 

(3) Agreements in which the lessee agrees to lease the chattel for 
a minimum period at a rental which in the aggregate is sub- 
stantially equivalent to the purchase price. In addition, he is 
given the option to purchase the chattel at the end of the rental 
period for a sum based on the anticipated residual value of the 
chattel. 

(4) Agreements in which the basic rental is equivalent to the pur- 
chase price and in which, instead of an option to purchase, the 
lessee is given the option to renew the lease at a nominal rental 
that, in conjunction with the basic period, will exhaust the nor- 
mal useful life of the chattel. 

(5) Agreements in which the maximum rental payments equal the 
purchase price and in which, as in the second type of agree- 
ment, the lessee has an option to purchase the goods for a 
nominal sum at the end of the rental period. In addition, the 
lessee has the right to terminate the agreement at any time 
without being required to pay an additional sum if he exercises 
the right. 

(6) Agreements in which the rental payments equal the purchase 
price and which, as in the second type of agreement, confer 
an option upon the hirer of becoming the owner upon paying 
the last instalment or tendering an additional sum of a nominal 
amount. However, unlike the second type of agreement, this 
type entitles the hirer to terminate the agreement at any time, 
subject to his paying a minimum amount "in respect of the 
use" of, or by way of compensation for the "depreciation" of, 
the chattel. This minimum sum may be a fixed proportion of 
the hire-purchase price such as one-third or two-thirds or it 
may be based on the unpaid balance of the hire-purchase price, 
for example, the difference between the hire-purchase price and 
the sum of the value of the goods at the termination of the 
contract and the instalments already paid. 

The first and second types of agreement were common in North America 
and the United Kingdom in the second half of the last century; the 
third and fourth types reflect current usages in North America. The 
fifth was common in England at the beginning of this century, and the 



51 

last is the type of hire-purchase agreement in current use in the United 
Kingdom and other parts of the Commonwealth. 

The key in determining which of these agreements amounts to a 
disguised conditional sale turns on whether one applies an intention or 
substantial character test, or whether one follows the obligation test 
adopted by the House of Lords in Helby v. Matthews. 12 The difference 
between these tests may be stated in this way: the intention or substan- 
tial character test looks at the overall impact of the agreement and the 
intention of the parties as gathered from all the surrounding circum- 
stances; the obligation test restricts itself to asking whether the lessee or 
hirer has obligated himself to pay the price and acquire the title to the 
goods, and ignores all other considerations. The majority of American 
courts have long favoured the intention or substantial character test. The 
English and other Commonwealth courts have generally followed the 
Helby v. Matthews test without much hesitation. 73 

The intention test has now been formally enshrined in section 1-201 
(37) of the Uniform Commercial Code. 14 There is no specific counterpart 
to the section in the Ontario Personal Property Security Act, but it seems 
reasonably safe to assume that the courts will import the intention test 
by necessary implication. In any event, the substantial character test 
adopted for all security agreements in section 2(a) of The Personal 
Property Security Act 15 will probably lead to the same result in most 
cases. 

In our opinion, the intention or substantial character test is clearly 
to be preferred to the legal obligation test. We therefore recommend 
including in the revised Act an appropriate provision dealing with the 
scope of the Act, a provision which will dovetail with the provisions in 



72[1895] A.C. 471 (H.L.). 

73 For some Canadian illustrations, see: C.A.C. Leasing Co. v. Calce, [1969] 
2 O.R. 707, 6 D.L.R. (3d) 495 (Ont. C.A.); and, Canadian Acceptance Corp. 
Ltd. v. Regent Park Butcher Shop Ltd. (1969), 3 D.L.R. (3d) 304 (Man. 
C.A.). Note, however, that Interpretation Bulletin IT-233 (July 14, 1975) on 
the Canadian Income Tax Act adopts the intention or substantial purpose test. 
74UCC 1-201(37) provides in part: 

Unless a lease or consignment is intended as security, reservation of title 
thereunder is not a 'security interest' but a consignment is in any event 
subject to the provisions on consignment sales (Section 2-326). Whether a 
lease is intended as security is to be determined by the facts of each case; 
however, (a) the inclusion of an option to purchase does not of itself 
make the lease one intended for security, and (b) an agreement that upon 
compliance with the terms of the lease the lessee shall become or has the 
option to become the owner of the property for no additional consideration 
or for a nominal consideration does make the lease one intended for secur- 
ity. 

75Section 2(a) provides: 

Subject to subsection 1 of section 3, this Act applies, 

(a) to every transaction without regard to its form and without regard to 
the person who has title to the collateral that in substance creates a 
security interest, including, without limiting the foregoing, 
(i) a chattel mortgage, conditional sale, equipment trust, floating 

charge, pledge, trust deed or trust receipt, and 
(ii) an assignment, lease or consignment intended as security. 



52 

The Personal Property Security Act. 16 The wording of UCC 1-201(37), 
however, leaves something to be desired. We think it sufficient simply 
to state that "Whether or not a contract in the form of a lease of goods, 
bailment, hire-purchase, consignment or otherwise is a contract of sale 
depends on the intention of the parties, the substantial effect of the 
contract and all the other surrounding circumstances". The courts can 
then be left free to develop more refined criteria in the light of the 
abundant case law and literature that is now available in this area. This 
approach seems preferable to a long shopping list and, as opposed to pre- 
determined criteria, will be easier to apply to changing conditions. 

Apart from the characterization issue, two other issues involving 
true chattel leases deserve to be considered. The first concerns the de- 
sirability of extending the implied warranties in the revised Sale of Goods 
Act, or some of them, to include such leases. 77 We favour such a step 
because of the uncertainty that still surrounds the scope and content of 
the implied warranties in leasing agreements. However, it will be con- 
venient to postpone further consideration of this question to a later part 
of this Report. 78 

The other issue involves the measure of the lessor's damages where 
he terminates the lease because of a breach of the agreement by the 
lessee. 79 Prima facie, the measure of damages should be governed by 
normal contractual principles, 80 and the lessor should be entitled to re- 
cover, depending on the circumstances, his net loss of profit or the defi- 
ciency in the agreed rental payments, after allowing for the resale value 
of the repossessed chattel. Unfortunately, the position has been much 
complicated, both in England and Canada, 81 by two judicial developments. 
The first is the striking down of liquidated damage clauses of all types 
on the ground that they are penal in character. The second difficulty stems 
from the English Court of Appeal's decision in Financings Ltd. v. Bal- 
dock. S2 In that case it was held that failure by the lessee in a hire-purchase 
agreement to pay one or two instalments does not, by itself, amount to a 
repudiation of the agreement and that, in the absence of such a finding, 
the repossessing lessor is only entitled to recover nominal damages. This 
course of judicial evolution leaves the lessor in an invidious position and 
at a serious disadvantage compared with the seller under a conditional 
sale. 



76See, Draft Bill, s. 2.2(3). 

77The implied warranties will automatically apply to security leases since the re- 
vised Act, following an earlier recommendation, will treat them as secured sales. 

78 See, infra, ch. 9. 

79See, generally, Varcoe, "Finance Leasing — an Analysis of the Lessor's Rights 
upon Default by the Lessee" (1976), 1 C.B.L.J. 117; and, Ziegel, "The Mini- 
mum Payment Clause Muddle", [1964] Camb. L.J. 108. 

^Interoffice Telephones v. Robt. Freeman Co. Ltd., [1958] 1 Q.B. 190 (C.A.). 

81 The English cases are reviewed in Goode, Hire-Purchase Law and Practice 
(2d ed.), ch. 18. A leading Canadian authority is C.A.C. v. Regent Park 
Butcher Shop Ltd. (1969), 3 D.L.R. (3d) 304 (Man. C.A.). 

82[1963] 2 Q.B. 104 (C.A.), foll'd in Canada, inter alia, in the Regent Park 
case, supra. The Regent Park decision was distinguished in Security Leasing Co. 
Ltd. v. Balkan Restaurant Ltd., [1976] 5 W.W.R. 590 (B.C., Cashman, 
C.C.J.) , but a higher court still has tfl rule on the soundness of the distinction. 



53 

A possible solution would be a statutory amendment assimilating 
the rights of a lessor to those of a conditional seller and, subject to proper 
safeguards, permitting the lessor after repossession and disposition of the 
repossessed goods to recover any deficiency in the lease price. Before its 
repeal, the Ontario Conditional Sales Act 83 had regulated from an early 
date the deficiency rights of conditional sellers. Similar provisions now 
appear in Part V of The Personal Property Security Act, which regulates 
the enforcement rights of all secured parties. Given these precedents and 
the close relationship between secured sales and many types of long term 
leases, it seems to us that The Personal Property Security Act would be a 
better place for this amendment than the revised Sale of Goods Act. In 
any event, we recommend that the question be referred for further study 
to the Advisory Committee on The Personal Property Security Act, a 
Committee that is currently reviewing the Act. 

4. The Meaning of "Goods" 

Section 1(1) (g) of The Sale of Goods Act provides that "goods" 
means "all chattels personal, other than things in action and money, and 
includes emblements, industrial growing crops, and things attached to or 
forming part of the land that are agreed to be severed before sale or under 
the contract of sale". The definition generally follows the pre- 1893 case 
law, with the possible exception of the category of "things attached to or 
forming part of the land". The latter part of the definition appears to be 
based on the doctrine of Marshall v. Green* 4 but may have enlarged it 
significantly, as will be seen presently. 

The Uniform Sales Act 85 adopted the British (and therefore Ontario) 
definition of goods. However, this continuity has been broken in Article 
2 of the Uniform Commercial Code, section 2-105(1) of which defines 
goods as follows : 

(1) 'Goods' means all things (including specially manufactured 
goods) which are movable at the time of identification to the con- 
tract for sale other than the money in which the price is to be paid, 
investment securities (Article 8) and things in action. 'Goods' also 
includes the unborn young of animals and growing crops and other 
identified things attached to realty as described in the section on 
goods to be severed from realty (Section 2-107). 

If the case law is a reliable guide, the aspect of the definition of 
goods that creates the greatest difficulties involves the status of things 
attached to land. Before dealing with this important issue, several other 
elements in the Ontario and Code definitions should be noted briefly. 

(a) "ALL CHATTELS PERSONAL" 

The phrase "chattels personal" has a well established meaning at 



83R.S.O. 1970, c. 76, s. 9. 
84(1875), 1 C.P.D. 35. 
85Section 76. 



54 

common law, 86 but its usefulness as a definitional basis in a modern sales 
act is open to question. The term covers all forms of personal property 
and therefore includes intangibles (things in action) as well as tangibles 
(things in possession). Since things in action are expressly excluded from 
the statutory definition, goods are in fact equated with movables. It would 
appear to be simpler to define goods as "all movable things", as section 
2-105( 1 ) of the Code has done, and we so recommend. 

If this recommendation is followed, for the sake of consistency, the 
definition of goods in The Personal Property Security Act 81 should be 
similarly amended, both on this point and with respect to the other 
points to be mentioned hereafter. 

(b) "specially manufactured goods" 

As will have been noted, there is no specific reference to this cate- 
gory of goods in the Ontario definition of the term contained in section 
1(1) (g). Prior to the enactment of the Uniform Sales Act, some Ameri- 
can jurisdictions appear to have characterized contracts for the manu- 
facture of individual goods as contracts of work and materials. The 
specific reference to "specially manufactured goods" in section 2-105(1) 
was presumably designed to reverse this classification. Whether this ex- 
pression was intended, or is capable, of being applied to a wider range 
of contracts is not clear. As has been noted, the difficulty experienced 
by the Anglo-Canadian courts was not with respect to the category of 
goods as such. Rather, the problem was to determine whether contracts 
involving a dominant element of personal skill, such as contracts to 
create works of art, should be treated as contracts of sale. There would, 
therefore, not appear to be any necessity for introducing the American 
gloss in the revised Ontario Act. 

(c) "things in action" 

Both section 1 (1 ) (g) of The Sale of Goods Act and UCC 1-105 ( 1 ) 
exclude "things in action" from the definition of goods. It appears to be 
well settled, 88 both at common law and under The Sale of Goods Act, 
that the term "things in action" covers all forms of incorporeal property. 
This would appear to be so whether or not the thing in action is evidenced 
by or incorporated in documents or instruments or other forms of writing, 
negotiable or otherwise; for example, share certificates, bonds, or bills 
of exchange. We do not believe it necessary to amplify the term "things 
in action" to make this clear. It may be noted that section 2-105(1) 
also expressly excludes "investment securities". Presumably, this exclu- 
sion was intended to reject pre-Code decisions treating shares of stock 
as goods, wares or merchandise under provisions similar to section 17 of 



^Colonial Bank v. Whinney (1885), 30 Ch. D. 261 (C.A.), especially per Fry, 
L.J., at pp. 285-86; and ibid. (1886), 11 A.C. 426 (H.L.), especially at pp. 
434, 438-40. 

S7R.S.O. 1970, c. 344, s. l(k). 

88Vaines, Personal Property (5th ed.), pp. 262 et seqr, Benjamin, footnote 54 
supra, para. 72. 



55 

the U.K. Statute of Frauds* 9 Since this construction was apparently never 
adopted in Anglo-Canadian law, we see no reason for adopting this 
feature of the Code definition. 

(d) "MONEY" 

Section 1 (1 ) (g) of the Ontario Sale of Goods Act excludes "money" 
from the definition of "goods". It has, however, been held in Canada, 90 
England, 91 and the U.S.A. 92 that money can be treated as goods when 
it is transferred as a commodity and not simply as a medium of exchange. 
The Code's definition of goods captures this distinction insofar as it 
excludes "the money in which the price is to be paid". The clarification 
is useful, and we accordingly recommend its adoption in the revised 
Ontario Act. 

(e) "unborn young of animals" 

This category of goods is expressly embraced in section 2-105(1), 
but has no counterpart in The Sale of Goods Act or in the Uniform Sales 
Act. It is, however, recognized, at least for some purposes, in section 
13(1) of The Personal Property Security Act. There appears to be a lack 
of direct authority dealing with the sale of the unborn young of animals. 
In principle, however, an attempt at common law to make a present but 
separate sale of animals conceived but not yet born should have been 
ineffectual: it was of the essence of the definition of tangible chattels 
personal that they should be capable of transfer by possession. 93 It is 
possible that, once the young were born, the animals would pass to the 
buyer at common law under the doctrine of potential possession without 
any further act of appropriation by the seller; 94 but the doctrine has no 
bearing on the question whether the unborn young of animals can acquire 
a separate legal existence. 

The innovation in UCC 2-105(1) is not as far reaching as may 
appear at first sight. By virtue of section 2-501, it is true, the buyer 
obtains a special property and an insurable interest as soon as the young 
are conceived; however, in the case of a contract for their future sale, 
section 2-501 (c) adds the restriction that the young must be conceived 
within twelve months of the contract. In either event, even after concep- 



89This explanation is not offered in Official Comment 1 to UCC 2-105, but is to 
be inferred from the discussion in Williston, footnote 42 supra, sec. 67. Note 
that section 4 of the Uniform Sales Act (the Statute of Frauds provision) ex- 
pressly included choses in action. Compare, Agar v. Orda (1934), 190 N.E. 
479, 99 A.L.R. 269 (N.Y.). Note, too, that UCC 1-206 contains various re- 
quirements with respect to contracts for the sale of personal property not else- 
where covered in the Code where the amount involved exceeds $5000. 

90/?. v. Vanek, [1969] 2 O.R. 724 (H.C.J. ); R. v. Behm (1969), 12 D.L.R. (3d) 
260 (Que. C.A.). 

^Moss v. Hancock, [1899] 2 Q.B. Ill, as interpreted in Benjamin, footnote 54 
supra, para. 76. 

92\Villiston, footnote 42 supra, sec. 66b. 

^Halsbury's Laws of England (3rd ed., 1962), Vol. 29, para. 714, p. 359. 

940n this point, see Benjamin, footnote 54 supra, para. 98; Williston, footnote 42 
supra, sees. 133 et seq.; and, Fridman, Sale of Goods in Canada (1973), p. 46. 
The doctrine has not been adopted in The Sale of Goods Act. 



56 

tion, the risk of loss prima facie remains with the seller until, depending 
on the circumstances, the buyer has received "the goods" or there has 
been a tender of delivery. 95 These requirements clearly postulate the 
birth of the animals. 

So far as the buyer's position vis-a-vis third parties is concerned, 
this will depend upon the construction of another group of Code pro- 
visions, whose impact on this type of contract is not always clear. As a 
result of UCC 2-722 (a), the buyer with a special property would appear 
to have a right to sue for actionable injury caused by a third party's 
dealing with the animals, but his right to sue in conversion would not 
arise unless the risk of loss had passed to the buyer. Further, his right to 
resist a seizure by the seller's creditors is very circumscribed, 96 and a 
wrongful resale by the seller to a buyer in ordinary course of business 
could also override the first buyer's prior interests by virtue of the "en- 
trusting" doctrine in UCC 2-403 (2 ). 97 Whether there can be an effective 
transfer of title to the buyer under the residuary provisions in UCC 2- 
401(3)(b), even before the young are born, is arguable, although a literal 
reading of the subsection would lead to this conclusion. 

These provisions may need to be re-examined and clarified if Ontario 
decides to recognize the unborn young of animals as a separate category 
of goods in the revised Act. On balance we have decided that it is a 
desirable change, although its practical, or legal, importance should not 
be exaggerated. Accordingly, we recommend that the definition of "goods" 
in the revised Act should recognize the "unborn young of animals" as a 
separate category of goods. We base our recommendations on several 
grounds. In the first place, Ontario law already recognizes the possibility 
of a present sale of growing crops or other things attached to land, and 
in principle there appears to be no distinction between such a sale and 
the sale of unborn young. Secondly, there is no reason why, for example, 
the buyer of the offspring of a famous racing horse or prize bull should 
not be able to insure them even before birth; or, indeed, why he should 
not have a right of action against a third party who injures the unborn 
young. Thirdly, important changes are occurring in breeding practices 
(including, particularly, the introduction of embryonic transplant tech- 
niques), which may enhance the commercial importance of interests in 
the unborn young. 

In our opinion, the enlarged definition of goods will not unfairly 
prejudice the rights of third parties. Under existing law, where a seller 
is left in possession of goods following their sale, he can, in certain 
circumstances, confer a better title on a purchaser than he himself has. 
As will be seen in chapter 12 of this Report, we propose retaining this 
rule in the revised Act, albeit with some qualifications. As a result, a 
buyer of the young of animals who has satisfied himself that there are no 
registered interests, under The Personal Property Security Act 98 or other 



95UCC 2-509(3). 
96UCC 2-402. 
97See, infra, ch. 12. 
98R.S.O. 1970, c. 344 as am. 



57 

relevant legislation, against the mother animal will not have to concern 
himself with any possible prior sales by the seller of which he is ignorant. 
In short, he will be in no different position from any other buyer of goods 
from a seller without title. 

(f ) GOODS AND LAND 

We turn now to the most troublesome set of problems in connection 
with the definition of goods. The difficulties are compounded because of 
a conflict between the definition of goods in The Sale of Goods Act and 
the definition of land in the Ontario real property statutes." The key 
issue is whether a contract for the sale of things attached to or forming 
part of the land, that are to be severed from the land under a contract, 
should be treated as a contract for the sale of goods or as a contract 
for the sale of an interest in land. In the discussion that follows, it will 
be convenient to distinguish between the Anglo-Canadian law and the 
approach to the same problems adopted in the Uniform Commercial 
Code. 

(i) Anglo-Canadian Position™ 

In general, the pre-1893 law drew a distinction between two types 
of contract: namely, contracts that required the seller to sever the things 
and deliver them to the buyer; and, those that authorized or required the 
buyer to do the severing and, for this purpose, created an interest in the 
land or conferred a licence upon the buyer to enter the land. 101 If 
the contract fell into the former category, it was treated as a contract 
for the sale of goods and no interest in the things attached to or form- 
ing part of the land was deemed to pass to the buyer until they had 
been severed from the land and appropriated to the contract. If the 
contract was of the latter kind, it was treated as a contract for the sale 
of an interest in land and, subject to two exceptions, was therefore gov- 
erned, inter alia, by section 4 of the English Statute of Frauds, 102 which 
contained requirements as to formalities. Each of these exceptions in- 
volved the products of the soil and should be briefly noted. 

The first exception concerned fructus industriales, which has been 
defined as "fruits or crops produced 'in the year, by the labour of the 
year' in sowing and reaping, planting and gathering, e.g., corn and po- 
tatoes". 103 Under the Statute of Frauds, growing crops of this nature were 



99"Land" is defined in The Conveyancing and Law of Property Act, R.S.O. 1970, 
c. 85, s. 1(1) (b) as including: "messuages, tenements, hereditaments, whether 
corporeal or incorporeal, and any undivided share in land". The definition in 
The Registry Act, R.S.O. 1970, c. 409, s. 1(d) reads as follows: "'land' means 
land, tenements, hereditaments and appurtenances and any estate or interest 
therein". 

100 See, generally, Benjamin, footnote 54 supra, paras. 82-92; Fridman, footnote 94 
supra, pp. 11-12. 

lOiFor the post- 1893 characterization of the rights of entry, see Jones & Sons 
Limited v. Tankerville, [1909] 2 Ch. 440; and, Waimiha Sawmilling Co. Ltd. v. 
Howe, [1920] 39 N.Z.L.R. 681 (C.A.). 

WlLee v. Risdon (1816), 129 E.R. 76. 

^Saunders v. Pitcher, [1949] 2 All E.R. 1097, 1104, 31 T.C. 314 (C.A.). 



58 

treated as chattels and not as part of the land or an interest in land, and 
an agreement for the sale of such crops, whether mature or immature, 
and whether the property in them was purportedly transferred before or 
after severance, was not governed by section 4. 

The second, more limited, exception involved jructus natur ales', that 
is, the natural growth of the soil, such as grass, timber and fruit on trees. 
Initially, and before severance, they were regarded as part of the soil, 
and a contract that purported to convey an immediate interest in them 
while still in their attached state was held to be a sale of an interest in 
land and, hence, subject to section 4. However, in Marshall v. Green, 104 
a unanimous Court of Common Pleas held that a contract for the sale 
of standing timber to be cut down and removed by the buyer as soon 
as possible, was a transaction within section 17 dealing with the evident- 
iary requirements of a sale of goods, and not section 4. The Court rea- 
soned that, since the trees were in a mature state, the soil served as a 
kind of warehouse and not to provide further nourishment. 

Though this rationale could well have been extended to a much 
broader category of things, the pre- 1893 cases showed no disposition 
to do so. Even before Marshall v. Green it had been held that the sale 
of a fixture, other than the sale by a tenant of a tenant's fixtures, was 
within the reach of section 4; and in Lavery v. Pursell 105 Chitty J., refused 
to apply the principle in the Marshall case to a contract for the sale of a 
building which was to be demolished by the buyer. Morgan v. Russell, 106 
although decided after the Sale of Goods Act, J 893, indicates that the 
same opposition would have been shown towards an attempt to extend 
the doctrine to a contract for the sale of minerals. 

The Sale of Goods Act, section l(l)(g), defines goods to include 
"emblements, industrial growing crops, and things attached to or forming 
part of the land that are agreed to be severed before sale or under the 
contract of sale". It is not clear whether Chalmers intended to reproduce 
the narrow construction of the effect of Marshall v. Green reflected in 
the above cases, or whether, in contrast to his usual approach, he sought 
to establish an enlarged meaning of goods, beyond the meaning war- 
ranted by the case law. Unfortunately, this part of the statutory definition 
of goods lends itself to both interpretations and is ambiguous in other 
respects. All three categories enumerated in section 1(1) (g) raise diffi- 
cult questions that require brief comment. "Emblements" is a species of 
fructus industrials and describes the crops, growing at the determination 
of an estate of uncertain duration, that the tenant is entitled to cut and 
take away. 107 It is not clear why Parliament thought it needed separate 
enumeration; it may have been done out of an excess of caution. The 
learned editors of Benjamin's Sale of Goods express the view that "as a 
subject of sale, the term 'emblements' appears to be intended to mean 
simply fructus industrials" 108 If this interpretation is correct, it appears 

104(1875), 1 C.P.D. 35. 

105(1888), 39 Ch. D. 508. 

106[1909] 1 K.B. 357. 

l07See, Benjamin's Sale of Goods (1974), pp. 58-59. 

108/6,7/., p. 59. 



59 

to make superfluous the specific reference to the second category, "indus- 
trial growing crops". Benjamin's explanation of the duplication is that 
the latter term was added to the definition when the Sale of Goods Act, 
1893, was extended to Scotland. To add to the confusion, we are told 109 
that "industrial growing crops" is not an expression in regular use in the 
law of Scotland, and that its meaning may be wider than fructus indus- 
triales. It is doubtful that other Commonwealth jurisdictions appreciated 
the subtlety of these distinctions when they adopted the U.K. Act, and 
the case for resolving the ensuing ambiguities hardly needs labouring. 

What then was the meaning intended to be conveyed by the third 
category, "things attached to or forming part of the land"? The words 
lend themselves to three possible interpretations. The first reads them 
literally and therefore leads to the conclusion that the common law defi- 
nition of goods has been greatly enlarged. As a result, such diverse cate- 
gories of things attached to land as fixtures, minerals, and structures can 
now constitute the subject of a present sale. On the whole, however, text- 
writers 110 read the words ejusdem generis with emblements and industrial 
growing crops, and thus restrict their meaning to all or certain types of 
growing crops. Counsel in Morgan v. Russell 111 adopted this rendering 
and, at least sub silentio, it appears to have won the Court's support. 
The third reading is a variant of the second and appears to construe 
"things attached to and forming part of the land" as applying to fructus 
naturales. A substantial number of courts appear to have subscribed to 
this version. However, almost all the reported cases involve the sale of 
natural or cultivated products of the soil, and too much should not be 
read into the judgments. Whichever of these meanings is preferred, all of 
them raise difficulties. Several of these difficulties, as now discussed, re- 
main to be resolved. 

First, must a contract of sale of things attached to or forming part 
of the land require the things to be severed promptly, where the severance 
is to be effected by the buyer? The statutory definition does not address 
itself to this question, and Canadian courts have expressed widely diver- 
gent views. 112 . 

Secondly, is it possible for the buyer to obtain title to the goods 
while they are still attached to the land, given the fact that the goods are 
not in a deliverable condition within the meaning of the presumptive rules 
for the passage of title under section 19, Rules 1 to 3, of The Sale of 
Goods Act? The courts in Morison v. Lockhart 113 and Kursell v. Timber 



i09Ibid. 

n°For example, Benjamin, Sutton, Williston. 

nx Supra, footnote 106. 

H2For example, Fredkin v. Glines (1908), 9 W.L.R. 393 (Man. C.A.); Sharpe v. 
Dundas (1911), 18 W.L.R. 86 (Man. C.A.); Carlson v. Duncan, [1931] 2 
W.W.R. 343 (B.C.C.A.); McKenzie v. Harvey & Blanchard, [1930] 1 D.L.R. 
547 (N.S.S.C.). For pre-SGA Ontario cases adopting a restrictive view, see, 
Summers v. Cook (1880), 28 Gr. 179; Handy v. Carruthers (1894), 25 O.R. 
279 (H.C.J.); and, Ford v. Hodgson (1901), 3 O.L.R. 526 (Div. Ct.). Com- 
pare, McGregor v. Whalen (1914), 31 O.L.R. 543 (C.A.). 

U31912 S.C. 1017 (Sc). 



60 

Operators & Contractors Ltd. 114 appear to have held that the buyer can- 
not so obtain title, but this view is difficult to reconcile with the wording 
of the definition of goods and the decision in Marshall v. Green. 115 A 
reading of section 19 suggests, however, that the requirement of deliver- 
ability only applies where the onus rests on the seller to put the goods 
into a deliverable condition. If this interpretation is accepted, the diffi- 
culty raised by the post- 1893 cases disappears. 

Thirdly, to what extent is the statutory characterization binding on 
third parties who claim a real property interest in the subject matter of 
the sale? In the Morison case, the Scottish Court of Sessions held unani- 
mously that the characterization only binds the seller and buyer, and does 
not affect the rights of third parties. Obviously the conflict is an impor- 
tant one and will have to be resolved if the provisions concerning this 
class of chattels are to be put on a satisfactory footing in the revised 
Ontario Act. 

It will be convenient to combine further discussion of these diffi- 
culties with an examination of the corresponding provisions in Article 2. 

(ii) The Code Provisions 

UCC 2-107 divides things to be severed from realty into two princi- 
pal categories. The section provides as follows: 

( 1 ) A contract for the sale of minerals or the like (including oil 
and gas) or a structure or its materials to be removed from realty 
is a contract for the sale of goods within this Article if they are to 
be severed by the seller but until severance a purported present sale 
thereof which is not effective as a transfer of an interest in land is 
effective only as a contract to sell. 

(2) A contract for the sale apart from the land of growing 
crops or other things attached to realty and capable of severance 
without material harm thereto but not described in subsection (1) 
or of timber to be cut is a contract for the sale of goods within this 
Article whether the subject matter is to be severed by the buyer or 
by the seller even though it forms part of the realty at the time of 
contracting, and the parties can by identification effect a present sale 
before severance. 

(3) The provisions of this section are subject to any third party 
rights provided by the law relating to realty records, and the contract 
for sale may be executed and recorded as a document transferring an 
interest in land and shall then constitute notice to third parties of the 
buyer's rights under the contract for sale. 

Contracts for the sale of minerals "or the like" or a structure or its 
materials to be removed from the land, fall into the first category. 116 
These are treated as contracts for the sale of goods, if the things are 



H4[i927] 1 K.B. 298 (C.A.) 
u5 Supra, footnote 104. 
H6UCC 2-107(1). 



61 

to be severed by the seller. The second category 117 comprises growing 
crops, other things attached to realty and capable of severance without 
material harm thereto and not falling into the first category, and timber 
to be cut. 118 A contract involving these items is treated as a contract 
for the sale of goods, whether the subject matter is to be severed by 
the buyer or the seller, even though it forms part of the land at the time 
of contracting. It is made explicit that the parties can by identification 
effect a present sale before severance. However, such contracts are sub- 
ject to any third party rights provided by the law relating to realty 
records. 119 The buyer can protect his position by recording the contract 
as a document transferring an interest in land and, if he does so, it will 
constitute notice to third parties of his rights under the contract. 

In the light of the foregoing description it will be seen that the 
Code's treatment differs substantially from the treatment in The Sale of 
Goods Act. Some of the changes may be welcomed as obvious improve- 
ments, but the justification for others is less clear. So far as we have 
been able to ascertain, there appears to be no practice in Ontario that 
treats contracts for the sale of minerals, where the buyer is to effect the 
severance, as contracts other than for the sale of an interest in land; 120 
therefore, this aspect of UCC 2-107(1) can be viewed with equanimity. 
However, the same cannot be said with respect to the sale of a structure 
that is to be removed or demolished. In our view, there appears to be no 
sound reason of policy why such a contract should be treated differently 
from a contract for the sale of timber. 121 

The abolition of the distinction between jructus naturales and fruc- 
tus industriales and the establishment of a single category of "growing 
crops" in UCC 2-107(2) is a welcome improvement. Also welcome, we 
think, is the implicit recognition that a sale of fixtures may be treated as 
a contract for the sale of goods. However, the rationale for the restriction 
that such things must be capable of severance "without material harm" to 
the land is less clear. If the seller of the attachments is also the owner of 
the land he is obviously not prejudiced. He has assumed the risk. If he is 
not the owner, or if other third parties may be detrimentally affected by 
the severance, they will have their remedy in damages or otherwise under 
other branches of law. This is the solution adopted in UCC 9-313 and in 
the comparable provision in The Personal Property Security Act 122 with 
respect to the enforcement of a security interest in fixtures. It is difficult 

H7TJCC 2-107(2). 

118 The pre- 1972 Code treated a contract for the sale of timber to be cut as falling 
within the first category. The change was made in the 1972 Official Text to 
reflect changes to the 1962 Text adopted by several timber-growing states. 
Apparently, these jurisdictions found that financing of the transaction is facili- 
tated if the timber is treated as goods instead of real estate: see, Uniform 
Commercial Code, 1972 Official Text, pp. 741-42. 

H9TJCC 2-107(3). 

i20Compare the Bank Act, R.S.C. 1970, c. B-l, s. 82(5), which requires the bank 
to perfect a security interest in hydrocarbons by registering required documents 
in the appropriate land registry or land titles office. 

121 It was treated as a contract for the sale of goods under the Uniform Sales Act 
if the building was to be promptly removed: see, Williston, footnote 42 supra, 
sec. 66 and n. 17. 

i22See, R.S.O. 1970, c. 344 as am., s. 36(4). 



62 

to see how the position of third parties will be improved by treating the 
transaction as exclusively a contract for the creation of an interest in land. 

The requirement that contracts of this hybrid category must be reg- 
istered in the appropriate land registry office in order to perfect the buyer's 
interest vis-a-vis realty claimants, is also a welcome clarification. As we 
construe the Code provisions, registration will not confer on the buyer a 
better title than his seller had, or had power to confer; and, if the seller 
was not empowered to authorize severance of the things, the buyer must 
suffer the consequences. But the converse rule also applies: namely, that 
registration by the buyer in the appropriate land registry office would con- 
fer upon the buyer the protection against realty claimants afforded any 
purchaser of land. This approach is consistent with one reading of the 
decision in M orison v. Lockhart. 123 The adoption of a registration pro- 
vision in Ontario would bring the law into harmony with similar provisions 
involving the perfection of security interests in fixtures. 124 Accordingly, we 
recommend that a provision similar to UCC 2-107(3) be adopted in the 
revised Act, and our Draft Bill so provides. 125 

Next, we turn to the Code's treatment of the time of severance. The 
Code attaches no requirement that the goods must be severed within any 
particular period. This permissiveness may occasion some surprise, given 
the fact that it is not unusual to find contracts for the sale of timber that 
is not to be cut, or that do not require the buyer to effect severence, for 
several years. However, the difficulty is more apparent than real. So far 
as the parties themselves are concerned, there is no more reason to restrict 
their right to determine the duration of the contract than there is in the 
case of other long term contracts. So far as third parties are concerned, 
if they claim a realty interest in the goods they will be protected by the 
registration requirement noted above. If their interest in the goods arises 
qua goods, they will be entitled to the protection afforded by the pro- 
visions in Article 2 dealing with the effect of goods left in the seller's pos- 
session after identification or sale of goods "entrusted" to a merchant. 126 

There remains for discussion the provisions of the Code relating to 
the conditions that must be satisfied before the buyer obtains an identifi- 
able interest and/or title in the things attached to the land. As is discussed 
in chapter 11, the Code's general approach to the transfer of title be- 
tween seller and buyer, and its significance for the solution of particular 
problems, is quite different from the rules obtaining under The Sale of 
Goods Act. In the case of a contract for the sale of existing and identified 
goods, and in the absence of explicit agreement to the contrary, the buyer 
obtains a special property and an insurable interest in the goods as soon 
as the contract is made. 127 If the contract is for the sale of future crops, 
identification is deemed to occur when the crops are planted or otherwise 

i^Supra, footnote 113. 

!24For example, The Conditional Sales Act, R.S.O. 1970, c. 76, s. 10 (now re- 
pealed), and its successor, The Personal Property Security Act, footnote 122 
supra, s. 36. For the history of the earlier provisions, see Goode and Ziegel, 
footnote 35 supra, ch. 16, pp. 173-78. 

l25See, Draft Bill, s. 2.5(3) and (4). 

!26See, UCC 2-403(2). 

127TJCC 2-501(1) (a). 



63 

become growing crops, provided that the crops are to be harvested within 
twelve months or the next normal harvesting season after contracting, 
whichever is longer. 128 In neither case does Article 2 require the goods to 
be in a deliverable condition. As has already been noted, UCC 2-107(2) 
also expressly provides, in the case of a contract for the sale of crops and 
other things attached to realty, that the parties can by identification "effect 
a present sale before severance". These provisions therefore dispose of 
the problem that troubled the courts in Morison v. Lockhart 129 and Kur- 
sell v. Timber Operators & Contractors Ltd. uo Even in the absence of 
title, a special property is sufficient to give the buyer a right of action 
against a third party for wrongful dealing with identified goods, other 
than injury resulting from the destruction or conversion of the goods. 131 

The transfer of risk provisions may create some difficulties in their 
application to things attached to land. UCC 2-509(3) provides that in 
any case not within the preceding subsections, which do not apply to the 
contracts under consideration, "the risk of loss passes to the buyer on 
his receipt of the goods if the seller is a merchant; otherwise the risk 
passes to the buyer on tender of delivery". Neither limb of this rule ap- 
pears particularly apposite in the case of goods that are to be severed by 
the buyer. Conceivably, the courts may be willing to apply a generous 
interpretation to the meaning of "receipt" and "tender of delivery", or 
they may hold, as the section permits them to do, that the parties must 
have intended a different rule to apply. It is also open for consideration 
whether the merchant/non-merchant dichotomy is meaningful in a con- 
tract of sale where the buyer is responsible for the severance of the things 
attached to the land. It will be convenient to postpone further discussion 
of issues of transfer of risk until a later part of this Report. 132 

(iii) Conclusions 

It is obvious that the ambiguous definition of goods in The Sale of 
Goods Act needs clarification in its application to things attached to land. 
The difficulty is to determine where the line should be drawn or what 
criteria should be adopted. We prefer a twofold test based (a) on current 
or foreseeable practices, and (b) on the comparative merits of applying 
real property or personal property rules to determine the parties' rights 
and obligations under the contract in question. In short, we favour a func- 
tional test that is not wedded to traditional property classifications. 

Guided by this approach we do not find the provisions of UCC 2-107 
entirely satisfactory. The principal difficulties are those caused by the in- 
clusion of "a structure or its materials" in subsection ( 1 ) and the require- 
ment in subsection (2) that "other things attached to realty" must be 
capable of severance without material harm. The balance of the section 
appears to be satisfactory. To resolve the existing doubts, it should also 
be made clear that the time of severance is not material so long as sever- 



128TJCC 2-501 (l)(c). 

129 > Supra, footnote 113. 
™>Supra, footnote 114. 
1 3iUCC2-722(a). 
^Vnfra, ch. 11. 



64 

ance is intended under the terms of the contract. We have therefore re- 
vised UCC 2-107 to implement the suggested changes, and have included 
in our Draft Bill the following provision : 133 

(1) A contract of sale of minerals, hydrocarbons or other sub- 
stances to be extracted from land is a contract of sale of goods 
if they are to be severed by the seller, but until severance a pur- 
ported present sale thereof that is not effective as a transfer of 
an interest in land is effective only as a contract to sell. 

(2) A contract of sale, apart from the land, of growing crops, timber, 
fixtures or other things attached to the land that are intended to 
be severed under the contract of sale is a contract for the sale of 
goods 

(a) whether the subject matter is to be severed by the buyer 
or by the seller; and 

(b) even though the subject matter forms part of the land at 
the time of contracting and severance is to be at a later 
time; 

and the parties can by identification effect a present sale before 
severance. 

(3) The rights of a buyer under subsection 2 are subject to the in- 
terest of any person, other than the seller, who had a registered 
interest in the real property at the time of the contract of sale, 
and are subject to the interest of, 

(a) a subsequent purchaser or mortgagee for value of an in- 
terest in the real property; 

(b) a creditor with a lien on the real property subsequently 
obtained as a result of judicial process; or 

(c) a creditor with a prior encumbrance of record on the real 
property in respect of subsequent advances, 

if the subsequent purchase or mortgage was made or the lien 
was obtained or the subsequent advance under the prior encum- 
brance was made or contracted for, as the case may be, without 
actual notice of the contract of sale. 

(4) A notice in the form prescribed by the regulations may be 
registered in the proper land registry office and thereupon it 
shall, for the purposes of subsection 3, constitute actual notice 
of the buyer's rights under the contract of sale. 

(g) RECOMMENDED DEFINITION OF "GOODS" 

In light of the preceding discussion, it may be useful to set out our 
proposed new definition of goods. This definition incorporates the recom- 
mendations made above, and provides as follows: 134 



l 33 See, Draft Bill, s. 2.5. 
Mlbid.,s. 1.1(1)16. 



65 

'goods' means movable things, and includes the unborn young of 
animals, growing crops and other things attached to or forming part 
of land as provided in section 2.5, but does not include the money 
in which the price is to be paid or things in action. 

5. The Price 

Section 2 of The Sale of Goods Act stipulates that the price must be 
payable in money. An exchange or barter of goods will not satisfy the 
statutory test. 135 This bland statement, however, requires some important 
qualifications. It is clear, for example, that a price which is to be satisfied 
by the sale from the buyer to the seller of goods of equivalent or greater 
value, will meet the prescribed test. It is equally well settled that the price 
may be paid partly in cash and partly by means of a trade-in or other 
exchange, at any rate where the value of the trade-in is monetized. 136 
What remains excluded, therefore, is a pure barter agreement that is not 
tainted by any mention of a monetary figure. 

It is difficult to justify the insistence on a monetary consideration. 
UCC 2-304 does not do so. It provides as follows: 

(1) The price can be made payable in money or otherwise. If 
it is payable in whole or in part in goods each party is a seller of the 
goods which he is to transfer. 

(2) Even though all or part of the price is payable in an interest 
in realty the transfer of the goods and the seller's obligations with 
reference to them are subject to this Article, but not the transfer 
of the interest in realty or the transferor's obligations in connection 
therewith. 

It may be argued that, where a simple exchange or other non-monetary 
form of consideration is involved, it will be difficult to assess damages if 
either party breaches his contract. But this will be true however the con- 
tract is characterized. The real question, in our opinion, is whether sales 
rules should be applied by analogy to a contract involving non-monetary 
consideration, or whether it would be simpler to absorb such transactions 
into sales law by expanding the definition of price. While acknowledging 
that the problem is not of the first magnitude, we prefer the latter solu- 
tion. We therefore recommend the adoption of the Code section, and 
our Draft Bill contains a provision to this effect. 137 

6. Near Sales — Integration Or Analogy? 

The function of a legal concept is to identify the common elements 
in a recurring phenomenon, so that a common set of rules can be applied. 
The rules themselves will rarely be unique and their rationales may often 
lend themselves just as readily to a broader range of transactions than 



i35Compare, Simpson v. Connolly, [1953] 1 W.L.R. 911 (Q.B.); Robshaw Bros. 

Ltd. v. Mayer, [1957] Ch. 125, [1956] 3 All E.R. 833. 
136G. 7. Dawson (Clapham) Ltd. v. H. & G. Dutfield, [1936] 2 All E.R. 232 

(K.B.). 
i37See, Draft Bill, s. 2.6. 



66 

those isolated in the defining statute or the judicially contructed categories. 
Indeed, many of the rules may only be particularized applications of a 
general principle to a class of transactions. This is particularly true in the 
sales area. 

Of present interest, there are transactions that do not fall within the 
category of sales, but that, nevertheless, contain some elements that are 
common to sales. The task of applying, by analogy, sales rules to these 
closely related transactions in the absence of a statute will devolve upon 
the courts. Once codification is approached however, or an existing code 
is being revised, the definitional and analogical problems cannot be ig- 
nored. What then is the most desirable approach with respect to the treat- 
ment of near-sales in the revised Act? As the preceding pages have tried 
to indicate, there are many points at which the established contract of 
sale intersects with such near-sales transactions as contracts for work and 
materials and contracts for the hire or leasing of chattels. The common 
issues may touch the consensual elements of the transaction (the forma- 
tion of the agreement, the parties' obligations and their performance, 
remedies for breach and so forth), and only be of interest to the parties 
themselves. In other instances, disparate classifications may affect the 
rights of third parties such as creditors or persons buying goods from the 
party in possession. 

It would be tempting to ignore the problem and to continue, as 
before, to leave the task of integration and assimilation to the courts, 
without any form of guidance. However, this does not appear to be a 
satisfactory solution. The judicial response to analogical problems has 
been uncertain. Even at this late stage, for example, it is unsettled to what 
extent the implied warranties in The Sale of Goods Act apply to a leasing 
contract. 138 In addition, as Justice Stone lamented in a celebrated article 
in the Harvard Law Review, 139 the courts have been particularly reluc- 
tant to treat statute law "as both a declaration and a source of law, or as 
a premise for legal reasoning". Some more specific initiatives would there- 
fore appear to be in order. 

In the earlier sections of this chapter attention has been drawn to a 
number of possible approaches. Some of these have already been adopted, 
in the Code or elsewhere, while others were put forward by us in the 
form of recommendations. The following approaches are among the more 
important: 

(1) To expand the definition of sale in the revised Act so that it 
will capture transactions that, at present, are outside this defini- 
tion. As has been noted, the Code has adopted this approach in 
its definition of "price". However, as a noted American scholar 
has pointed out, 140 it may be dangerous to assimilate related 
types of transactions under a common label, because a solution 



138/n/ra, ch. 9. 

i39Stone, "The Common Law in the United States" (1936), 50 Harv. L. Rev. 4, 

13. 
^OFarnsworth, "Implied Warranties of Quality in Non-Sale Cases" (1957), 57 

Col. Law Rev. 653. 



67 

that may be apt to one type of problem may be inappropriate to 
another. 

(2) A more selective approach may, therefore, be desirable; for 
example, by extending particular provisions in the revised Act 
to specific types of near-sales. This solution has been recom- 
mended earlier 141 with respect to the applicability of the implied 
warranties to the material supplied under a contract of work and 
materials. 

(3) The verbatim application of a sales rule may not always be 
desirable because of perceived differences between the two types 
of transaction. For example, it may be felt that a lessor should 
not be required to warrant his title in a true leasing transaction. 
In such cases the preferred route may be to adapt the sales 
rules to the near-sale transaction as has been done, in the case 
of hire-purchase agreements, in the U.K. Supply of Goods (Im- 
plied Terms) Act I973. 142 

(4) Yet another approach, said to have been adopted in the Code, 143 
is to express in open textured language those provisions that are 
deemed to be capable of wider application to transactions in 
goods not technically amounting to a contract of sale. It has 
been suggested that this may be true of some twelve sections of 
Article 2. There is nothing wrong with this legislative technique, 
provided that it is systematically applied and provided that the 
draftsmen's objectives are clear to the average reader. Neither 
of these tests appears to be satisfied in the case of Article 2, 
and the Code's approach is not therefore recommended for 
adoption in Ontario. 

(5) A final possibility is to insert an explicit provision in the re- 
vised Act empowering the courts to apply all or any part of the 
Act to a related type of transaction, where the reason of the 
sales rule also applies to all or any aspect of the transaction 
in question. There is no precise exhortation to this effect in 
Article 2; but there is ample evidence 144 that the Code's spon- 
sors intended the Code to serve as a baseline for further develop- 
ment of commercial law. Moreover, this analogical approach 
has won warm support among commentators 145 and in the 
better reasoned decisions. 146 



MSupra, p. 48. 

1421973, c. 13 (U.K.), ss. 8-9. 

143 Speidel, Summers & White, Teaching Materials on Commercial Transactions 

(1969 ed.), pp. 457-58. 
l44See, for example, UCC 1-102(1), and especially Comment 1. 
14 5For example, Farnsworth, footnote 140 supra; Murray, "Under the Spreading 

Anology of Article 2 of the Uniform Commercial Code" (1971), 39 Fordham 

L. Rev. 447. 
l46For example, Newmark v. GimbeVs Inc. (1969), 258 A. 2d 697 (N.J.); Worrell 

v. Barnes (1971), 484 P. 2d 573 (Nev.); Colt v. Fradkin (1972), 281 N.E. 2d 

213 (Mass.); and compare, Rose Acre Farms Inc. v. L. P. Cavett Co. of Ind. 

(1972), 279 N.E. 2d 280 (Ind.); Garfield v. Furniture Fair-Hanover (1971), 

274 A. 2d 325 (N.J.). 



68 

Although we are not unanimous in our conclusion, 147 we are of the 
opinion that a general analogical provision would serve a number of useful 
purposes. In the first place, it will encourage the courts to consider the 
analogical issue, to examine the rationale of the sales rule, and to give 
considered reasons why the sales rule should or should not be followed, 
depending on the court's conclusion. Secondly, the analogical technique 
affords maximum flexibility and therefore avoids the pitfalls of total assi- 
milation or integration. Finally, it provides a bridge between a separate 
statutory regime for near-sale transactions, which is not likely to emerge 
in the foreseeable future, and no guidance at all. A majority of the Com- 
mission therefore recommends that the revised Act should contain a pro- 
vision empowering the court to apply any provision of the Act by way of 
analogy to transactions other than sales transactions. Accordingly, there 
should be included in the revised Act a provision to the effect that any of 
the provisions of the Act ". . . if relevant in principle and appropriate in 
the circumstances, may be applied by analogy to a transaction respecting 
goods other than a contract of sale such as a lease of goods or a contract 
for the supply of labour and materials". 148 We appreciate that our recom- 
mendation amounts to little more than a legislative endorsement of an 
accepted practice. The provision will not alter radically the law of near- 
sales; nor is this our intention. It is to be hoped, however, that our recom- 
mendation will encourage the law of sales and near-sales to develop in 
greater harmony with each other. 

RECOMMENDATIONS 

The Commission makes the following recommendations: 

1. The distinction between a merchant and non-merchant buyer or 
seller, contained in Article 2, should be applied in the revised 
Act in a limited range of circumstances turning on functional 
considerations. 

2. The nature of the interest of a conditional buyer should be 
clarified. The revised Act should make it clear that the seller's 
retention of title in the case of a conditional sale agreement is 
limited to the retention of a security interest. 

3. The revised Act should make it clear that its provisions apply 
to the sales incidents in a conditional sale agreement. The revised 
Act should not apply to a transaction that is intended to operate 
only as a secured transaction. 

4. The definition of contract of sale in the revised Act should make 
it clear that the Act applies to a case where the seller does not 



147 One of the Commissioners, the Honourable J. C. McRuer, wishes to dissent 
from this recommendation. In Mr. McRuer's view, section 2.2(4) as drafted, if 
enacted, would be an evasion of the responsibility of the Legislature to declare 
what the law is, and leaves it to the judges to make the law as the cases arise. 
This is not helpful to those engaged in business or to their advisers. The 
matter should be further considered by the Commission, and recommendations 
made for appropriate legislation. 

14 8See, Draft Bill, s.2.2(4). 



69 

warrant his title, or has otherwise excluded or restricted the im- 
plied warranty of title under the Act. 

5. The revised Act, following UCC 2-105, should apply to the 
sale of a part interest in existing identified goods, whether or not 
the sale is a sale between co-owners. The revised Act should also 
apply to the sale of an undivided share in an identified bulk of 
fungible goods, even though the quantity of the bulk is not deter- 
mined. 

6. The definition of contract of sale should include a contract for 
the supply of goods to be manufactured or produced by the 
seller, whether or not the goods are made specially to the buyer's 
order, and without regard to the relative value of the labour or 
materials involved in the production or manufacture of the goods. 

7. The implied warranties in the revised Act should apply to the 
materials supplied under a contract of work and materials, other 
than a contract falling within recommendation No. 6 supra, 
where the work or services are supplied in addition to the ma- 
terials but as part of the same contract. 

8. With respect to contracts of bailment, equipment leases, and 
hire-purchase agreements: 

(a) The revised Act should provide that, whether or not a 
contract in the form of a lease of goods, bailment, hire- 
purchase, consignment or otherwise is a contract of sale, 
depends upon the intention of the parties, the substantial 
effect of the contract, and all the other surrounding cir- 
cumstances. 

(b) The implied warranties in the revised Act should apply, 
with modifications, to true chattel leases, as more particu- 
larly set forth in chapter 9, infra. 

(c) The question of what, if any, statutory provisions are de- 
sirable to clarify the quantum of damages recoverable by 
a lessor in a true chattel lease for breach of the agreement 
by the lessee, should be referred for study to the Advisory 
Committee on The Personal Property Security Act. 

9. The revised Act should contain a new definition of "goods". The 
new definition should incorporate the concept of "movable 
things", should clarify the position of "money" by excluding 
only "the money in which the price is to be paid", and should 
recognize the "unborn young of animals" as a separate category 
of goods. The new definition should read as follows: 

'goods' means movable things, and includes the unborn 
young of animals, growing crops and other things attached 
to or forming part of land as provided in section 2.5, but 
does not include the money in which the price is to be paid 
or things in action. 

10. The definition of "goods" in The Personal Property Security Act 



70 

should be amended to harmonize with the definition of "goods" 
in the revised Sale of Goods Act. 

11. The present ambiguous definition of goods should be clarified 
in its application to things attached to or forming part of land. 
The following functional test, not wedded to traditional property 
classifications and modelled, in part, on UCC 2-107, should be 
adopted in the revised Act: 

(1) A contract of sale of minerals, hydrocarbons or other sub- 
stances to be extracted from land is a contract of sale of 
goods if they are to be severed by the seller, but until sever- 
ance a purported present sale thereof that is not effective as 
a transfer of an interest in land is effective only as a contract 
to sell. 

(2) A contract of sale, apart from the land, of growing crops, 
timber, fixtures or other things attached to the land that are 
intended to be severed under the contract of sale is a con- 
tract for the sale of goods 

(a) whether the subject matter is to be severed by the 
buyer or by the seller; and 

(b) even though the subject matter forms part of the land at 
the time of contracting and severance is to be at a later 
time; 

and the parties can by identification effect a present sale be- 
fore severance. 

(3) The rights of a buyer under subsection 2 are subject to the 
interest of any person, other than the seller, who had a 
registered interest in the real property at the time of the 
contract of sale, and are subject to the interest of, 

(a) a subsequent purchaser or mortgagee for value of an 
interest in the real property; 

(b) a creditor with a lien on the real property subsequently 
obtained as a result of judicial process; or 

(c) a creditor with a prior encumbrance of record on the 
real property in respect of subsequent advances, 

if the subsequent purchase or mortgage was made or the 
lien was obtained or the subsequent advance under the 
prior encumbrance was made or contracted for, as the case 
may be, without actual notice of the contract of sale. 

(4) A notice in the form prescribed by the regulations may be 
registered in the proper land registry office and thereupon it 
shall, for the purposes of subsection 3, constitute actual 
notice of the buyer's rights under the contract of sale. 

12. The revised Act should contain a provision comparable to UCC 



71 

2-304 permitting the price to be payable in money "or other- 
wise". 

*13. The revised Sale of Goods Act should contain a general pro- 
vision empowering the court to apply any provisions of the Act 
by way of analogy to transactions other than sales transactions. 
Accordingly, there should be included in the revised Act a pro- 
vision to the effect that any of the provisions of the Act ". . . 
if relevant in principle and appropriate in the circumstances, may 
be applied by analogy to a transaction respecting goods other than 
a contract of sale such as a lease of goods or a contract for the 
supply of labour and materials". 



The Commissions offers no recommendation with respect to 
the desirability or need for a separate Consumer Sales Act. 



* The Honourable J. C. McRuer dissents from this recommendation. See, foot- 
note 147, supra. 



part m 



[73] 



CHAPTER 5 



FORMATION, FORM AND 
ASSIGNMENT OF CONTRACT 



1. Introduction 

The Sale of Goods Act does not deal generally with the rules govern- 
ing the formation of the contract of sale, the basic policy of the Act being 
that unless otherwise provided the normal rules of contract shall apply. 1 
There are, however, exceptions to this basic policy. The Act contains pro- 
visions governing the following matters: namely, capacity to contract by 
minors and other persons under a disability; 2 Statute of Frauds writing 
requirements; 3 the effect of mistaken assumptions with respect to the 
existence of the goods; 4 the determination of the price where none has 
been fixed by the agreement; 5 sales on approval; 6 and, sales by auction. 7 

It will be convenient to postpone discussion of the questions of price 
and sales on approval to later chapters. The other provisions are examined 
here in the light of changes that have occurred since their original adop- 
tion, and they are compared with their Code counterparts. The oppor- 
tunity is taken, at the same time, to review some basic contract doctrines 
that have an important impact on the formational aspects of the contract 
of sale and that would appear to be in need of clarification and moderniza- 
tion. The topics so reviewed are the following: namely, some aspects of 
the law of offer and acceptance, in addition to the rules on sale by auction; 
the doctrine of consideration; the law of mistake; the parol evidence rule; 
and, assignment of contractual rights and delegation of performance. 

As has been noted in chapter 2, Article 2 of the Uniform Commercial 
Code contains many more provisions on the formational and construc- 
tional phases of the contract of sale than does the Ontario Sale of Goods 
Act. We have studied these provisions of Article 2 carefully, with a view 
to determining their suitability for inclusion in the revised Ontario Act. 
Predictably, we concluded that not all the problems that arise in connec- 
tion with the formation and construction of contracts are susceptible of 
an easy solution. Several will require further study. In a number of other 
instances (notably those affecting the doctrine of consideration, contracts 
for the benefit of third parties, and the law of mistake) we recommend 
either that changes in the revised Act should, where appropriate, be 
paralleled by a similar or even broader group of provisions in the pro- 
posed Law of Contract Amendment Act, or that the subject at large 
belongs more appropriately to an Act of the latter type. 



JSee, R.S.O. 1970, c. 421, s. 57(1) 

Vbid., s. 3. 

Wbid., s. 5. 

4 Ibid., s. 7. 

5 Ibid., ss. 9-10. 

6 1 bid., s. 19, R. 4. 

llbid., s. 56. 



[75] 



76 

2. Capacity To Contract and Contracts for Necessaries 

Section 3 of The Sale of Goods Act provides as follows: 

(1) Capacity to buy and sell is regulated by the general law 
concerning capacity to contract and to transfer and acquire prop- 
erty, but where necessaries are sold and delivered to a minor or to 
a person who by reason of mental incapacity or drunkenness is in- 
competent to contract, he shall pay a reasonable price therefor. 

(2) Necessaries in this section mean goods suitable to the con- 
ditions in life of the minor or other person and to his actual require- 
ments at the time of the sale and delivery. 

This section is not reproduced in Article 2, and it might be thought that 
a general provision, similar to section 57(1) of the present Act preserving 
the rules of the common law and equity and suitably expanded to cover 
contractual capacity, would be adequate. Disputes involving sale con- 
tracts with minors appear to be rare and, if the reports are any guide, 
have disappeared almost completely since the reduction of the age of 
majority in all provinces from 21 to 18 or 19. 8 

Notwithstanding these arguments, we recommend retention of section 

3. Even if its practical importance has greatly diminished, the section does 
no harm and, until such time as Ontario adopts a comprehensive law deal- 
ing with minors' contracts 9 and contracts with other persons suffering 
from a disability, it seems to us that some provision, however modest, is 
better than none at all. 

3. Offer and Acceptance 

Three sections of the Code will be discussed under this heading. The 
first two, sections 2-206 and 2-207, have no counterparts in The Sale of 
Goods Act, but raise significant questions of principle that are of every- 
day importance in the law of sales. The third section, section 2-328, does 
have a close parallel in section 56 of the Ontario Act, but differs from it 
in a number of material respects. 

(a) ucc 2-206: acceptance by performance 10 

Section 2-206 of the Uniform Commercial Code provides as follows: 

(1) Unless otherwise unambiguously indicated by the language 
or circumstances 

(a) an offer to make a contract shall be construed as inviting 



8 See, for example, The Age of Majority and Accountability Act, S.O. 1971, 
c. 97. 

9The Family Law Reform Act, 1978, c. 2, s. 33, deals with one aspect of 
minors' contracts for necessaries. 
10 Compare, Murray, "Contracts: A New Design for the Agreement Process" 
(1968), 53 Corn. L. Rev. 785, 792-800, and Note, "The Uniform Commercial 
Code and Contract Law: Some Selected Problems. Part 1. Formation of a Con- 
tract-Acceptance" (1957), 105 U. Pa. L. Rev. 839. See, also, Holmes, "The 
Agreement Process: A Reconciliation of the Required Notice of Performance 
in UCC 2-206(2)" (1972), 77 Com. LJ. 241. 



77 

acceptance in any manner and by any medium reasonable 
in the circumstances; 

(b) an order or other offer to buy goods for prompt or current 
shipment shall be construed as inviting acceptance either 
by a prompt promise to ship or by the prompt or current 
shipment of conforming or non-conforming goods, but such 
a shipment of non-conforming goods does not constitute an 
acceptance if the seller seasonably notifies the buyer that 
the shipment is offered only as an accommodation to the 
buyer. 

(2) Where the beginning of a requested performance is a 
reasonable mode of acceptance an offeror who is not notified of ac- 
ceptance within a reasonable time may treat the offer as having 
lapsed before acceptance. 

On a first reading, subsection (l)(a) merely appears, with one possible 
exception, to codify existing Anglo-Canadian jurisprudence with respect 
to the manner of acceptance of an offer where no particular manner is 
specified by the offeror. This possible exception is provided by the open- 
ing words of the subsection ("unless otherwise unambiguously indicated") 
which, arguably, tilt the balance more favourably towards the offeree than 
does the existing law. There is both internal and external evidence, how- 
ever, that clause (a) was intended to accomplish a more basic change in 
the law of offer and acceptance, and that it was meant 11 to reverse the 
presumption under earlier American law that an offer normally requires 
either a promissory acceptance or acceptance by performance and that, 
in case of doubt, the offer should be construed as inviting a promissory 
acceptance. In other words, "manner of acceptance" in UCC 2-206(1) (a) 
refers to acceptance by the offeree, either by promising to perform what 
the offer requests or by rendering the requested performance. Though this 
intention may be clear to an American lawyer, it would not be obvious to 
an Ontario reader. We have therefore concluded that any incorporation 
of section 2-206(1) (a) in the revised Ontario Act should be accompanied 
by language that makes it clear that acceptance may include performance 
of the requested Act. 

Subsection (1) (b) illustrates the type of offer envisaged in subsection 
(1) (a). Consider the following example: A forwards an order for goods to 
B and adds, "please ship as soon as possible". Is shipment of the goods an 
effective acceptance or does the offer require acceptance by communi- 

11 Murray, footnote 10 supra, at p. 793; and compare, Restatement of the Law, 

Contracts 2d, Tent. Draft Nos. 1-7 (Rev. & edited, 1973), ss. 29(2) and 31. 

Section 29(2), in language almost identical with UCC 2-206(1) (a), reads: 
Unless otherwise indicated by the language or the circumstances, an offer 
invites acceptance in any manner and by any mediium reasonable in the 
circumstances. 

Section 31 reads: 

In case of doubt an offer is interpreted as inviting the offeree to accept 
either by promising to perform what the offer requests or by rendering the 
performance, as the offeree chooses. 

The Comment to s. 31 explains in part that "The rule of this Section is a 

particular application of the rule stated in s. 29(2)." 



78 

cation? The effect of the Code rule is to permit either form of acceptance 
unless the offeror has evinced a contrary intention. It should be empha- 
sized that these provisions are not intended to weaken the rule that the 
offeror is master of his offer; rather, the theory of subsections (1) (a) and 
(b) is that the offeror is often indifferent as to whether acceptance takes 
the form of words of promise or acts of performance, "and his words 
literally referring to one are often intended and understood to refer to 
either". 12 Anglo-Canadian law provides no clear guidance with respect to 
this type of offer, 13 and we support the inclusion in the revised Act of 
provisions similar to UCC 2-206(1) (a) and (b), but subject to the 
clarification mentioned earlier with respect to clause (a). 14 

Although performance may be an approved mode of acceptance, 
it does not dispose of the question whether notification of acceptance by 
the offeree is a prerequisite to the "perfection" of his acceptance. 15 Ob- 
viously, the offeror is entitled to know where he stands, unless he has 
dispensed with notification or is likely to learn promptly by other means 
of the offeree's acceptance by performance. To illustrate: if the offeror 
and offeree are in the same city and the offeror places an order for goods 
for prompt delivery, separate notification of acceptance may reasonably 
be assumed to be waived. If, however, the offeror lives a considerable 
distance from the seller's place of business, notification would seem to be 
a proper requirement. Section 56(2) of the Tentative Draft of the Second 
Restatement on Contracts appears to us to strike the right balance. It 
provides as follows: 

(2) If an offeree who accepts by rendering a performance has 
reason to know that the offeror has no adequate means of learning 
of the performance with reasonable promptness and certainty, the 
contractual duty of the offeror is discharged unless 

(a) the offeree exercises reasonable diligence to notify the 
offeror of acceptance, or 

(b) the offeror learns of the performance within a reasonable 
time, or 

(c) the offer indicates that notification of acceptance is not 
required. 

It appears from section 63 of the Restatement, which we discuss 



^Restatement of the Law, Contracts 2d, Tent. Drafts Nos. 1-7, (Rev. & edited, 
1973), Comment to section 31. 

i3Compare, Treitel, The Law of Contract (3rd ed., 1970), p. 21, and ibid. (4th 
ed., 1975), p. 16. The Research Team's analysis of contractual forms used by 
CMA respondents shows that occasionally a purchase order will expressly 
authorize acceptance by shipment. 

i4See, Draft Bill, s. 4.4(1) (a) and (b). 

15 The term "perfection" is used in deference to the criticism by Professor 
Murray, footnote 10 supra, of the Code's suggestion that there is no acceptance 
until notification. He prefers the language in Restatement of the Law, Con- 
tracts 2d, ss. 56 and 63, which indicates that there is acceptance by perform- 
ance, but that the offeror's contractual duty is "discharged" unless notification 
is given in the required circumstances. See, also, Holmes, footnote 10 supra, 
at pp. 244-45. 



79 

below, that the tender or beginning of an invited performance is treated 
as an acceptance by performance, so that the notice requirement under 
section 56(2) applies to both partial and completed acts of performance. 
The formulation in section 56(2) is, in our view, much more felicitous 
than the ambiguous language of section 2-206(2), and we recommend 
its adoption in the revised Act. The Code provision suggests that notifica- 
tion is ordinarily only required where the offeree is relying on the begin- 
ning of a requested performance to demonstrate acceptance. This infer- 
ence was probably not intended, given the duty of notification imposed 
upon a shipping seller under UCC 2-504 (c), 16 but again this would not be 
evident to the average reader. 

Section 2-206(2) of the Code also raises a problem that has been 
much discussed in Anglo-American legal literature in the context of uni- 
lateral contracts: 17 namely, can the offeror revoke his offer before the 
offeree has completed the act of performance which, under the terms of 
the offer, entitles him to claim the promised consideration? The better 
view is that he cannot; 18 at any rate, not where an injustice would other- 
wise be done to the offeree. Section 45 of the First Restatement adopted 
such a rule in the case of unilateral contracts, 19 and section 63 of the 
Tentative Draft of the Second Restatement has now extended the rule 
to all cases where the offer invites acceptance by promise or performance. 
Section 63 provides as follows: 

( 1 ) Where an offer invites an offeree to choose between accep- 
tance by promise and acceptance by performance, the tender or be- 
ginning of the invited performance or a tender of a beginning of it 
is an acceptance by performance. 

(2) Such an acceptance operates as a promise to render com- 
plete performance. 

The opening part of UCC 2-206(2) ("Where the beginning of a re- 
quested performance is a reasonable mode of acceptance") implies the 
same rule. In our view, however, section 63(1) states the position more 
clearly, and we recommend the adoption of its language in the revised 
Act in preference to the formulation in UCC 2-206 ( 2 ). 20 

There is another reason for our preference. UCC 2-206(2) provides 
no guidance as to the circumstances in which the beginning of a requested 



16 See, UCC 2-206, Comment 2; and compare, Murray, footnote 10 supra, at p. 
799. Note, however, that failure to notify under UCC 2-504 (c) does not nullify 
the acceptance; it merely amounts to breach of the seller's contractual 
obligations. 

17 See, for example, H. W. Ballantine, "Acceptance of Offers for Unilateral Con- 
tract by Partial Performance of Service Requested" (1921), 5 Minn. L. Rev. 
94; Llewellyn, "Our Case Law of Contract: Offer and Acceptance, II" (1939), 
48 Yale L.J. 779, 802-18; Treitel, The Law of Contract (4th ed., 1975), pp. 
35-40; White & Summers, Handbook of Law Under The Uniform Commercial 
Code (1972), pp. 34-36. 

iSSee, Errington v. Errington, [1952] 1 All E.R. 149 (C.A.), at p. 153 {per Lord 
Denning). 

!9The rule appears in section 45 of the Second Restatement, footnote 12 supra. 

20See, Draft Bill, s. 4.4(2) (a). 



80 

performance is a reasonable mode of acceptance. On the face of it, it seems 
a paradoxical requirement, for it is difficult to conceive of the beginning 
of a requested performance that is not a reasonable mode of acceptance, 
and no such qualification appears in section 63 ( 1 ) of the Second Restate- 
ment. Conceivably, what the Code draftsmen had in mind was that, to 
constitute acceptance, the beginning of the requested performance "must 
unambiguously express the offeree's intention to bind himself". This is the 
language used in Comment 3 to section 2-206; but it does not amount to 
the same thing as the requirement that there must be a reasonable mode 
of acceptance. To illustrate: A forwards an order to B for 1,000 suits to 
be manufactured and delivered over the next three months, and adds 
"please start work at once". B had previously altered his production 
schedule in anticipation of this type of order and therefore does not need 
to give new instructions to his floor staff. B's proceeding to manufacture 
the requested suits would be a reasonable mode of acceptance, assuming 
it is followed by seasonable notification to the offeror, but it would be dif- 
ficult to argue that B's merely telling his staff about A's order amounts to 
an unambiguous act of acceptance. The need for an unequivocal act is 
implicit in the concept of part performance and would, we believe, in this 
context readily be appreciated by the courts. Moreover, the additional re- 
quirement of notice to the offeror provides the necessary safeguard that 
the offeree will not be able to play fast and loose with his order, and will 
usually resolve any lingering doubts that may remain with respect to the 
offeree's intentions. 

Finally, it should be noted that, pursuant to section 63(2), the 
acceptance constituted by part performance is a promissory acceptance 
and, unlike a unilateral contract, binds the offeree to render complete per- 
formance. This conclusion follows from the character of the offer and 
ensures reciprocity between the parties: the offeror cannot withdraw his 
offer once the requested performance has been begun; nor can the offeree 
refuse to complete performance because it no longer suits his purpose to do 
so. 21 The same rule as in section 63(2) is implicit in UCC 2-206(2), 
since the subsection speaks of the beginning of the requested performance 
constituting a reasonable mode of "acceptance"; once again, however, we 
prefer the clearer language of the Restatement, and recommend its adop- 
tion in preference to the language in UCC 2-206(2). 

To sum up, section 2-206 introduces several important concepts 
that are partly new to Canadian contract law or not adequately covered 
by authority. In our view, they are worthy of adoption in the revised 
Ontario Act. However, we favour a synthesized version of UCC 2-206 and 
sections 56(2) and 63 of the Second Restatement on Contracts, so that 
the meaning of the new provisions will be clear to the Ontario practitioner 
without the need for extended research into their American origins and 
judicial interpretation. We have attempted to achieve this objective in our 
Draft Bill. 22 



21 See, Hawkland, A Transactional Guide to the Uniform Commercial Code 
(1964), Vol. 1, sec. 1.1303, p. 34. 

22See, Draft Bill, s. 4.4. 



81 

(b) THE BATTLE OF THE FORMS 23 

Few formational problems are more difficult to resolve than the con- 
flict that arises when a buyer and seller use different forms to record the 
terms upon which they are willing to enter into a bargain. That the use 
of conflicting purchase order and acknowledgment forms is as common in 
Ontario as it is in the U.S., emerges clearly from the Research Team's 
analysis of contractual forms and the replies to the CM. A. Question- 
naire. 24 In a typical case the buyer forwards his printed purchase order 
form, which is made "subject" to the terms and conditions appearing in the 
same document. The seller responds by sending his acknowledgment or 
confirmation form, which also contains its own terms and conditions; how- 
ever, these often differ in material respects from those in the buyer's 
form. 25 Into this basic scenario many variants may be injected. A few 
examples will suffice: the exchange of forms may have been preceded, or 
be accompanied, by oral communications; one or other form may reject 
in advance any modifications to the terms in the form not expressly as- 
sented to in writing; or, one form may state a term that is not reproduced 
in the document of the other party. Most importantly, the parties may 
proceed with performance on the assumption that a binding agreement has 



23 See, also, Research Paper No. II. 1 on this topic by Professor Stephen M. 
Waddams. The American literature is voluminous. See the bibliography in 
Uniform Laws Annotated, Uniform Commercial Code, Vol. 1, pp. 217-19 and 
Cum. Ann. Pocket Part, and in Barron and Dunfee, "Two Decades of 2-207: 
Review, Reflection and Revision" (1975), 24 Cleveland S. Law Rev. 171, 
especially nn. 3-7. A particularly good discussion appears in Duesenberg and 
King, Sales and Bulk Transfers Under the Uniform Commercial Code, Bender's 
Uniform Commercial Code Service, Vol. 3, ch. 3. For a discussion of some of 
the problems from an English point of view, see Hodgett, "Changing a Bar- 
gain by Confirming It" (1970), 33 Mod. L. Rev. 518. 
24 See Waddams, Research Paper No. II. 1, p. 29. Professor Waddams estimates 
that as many as 60% of the CM A respondents have had some kind of exposure 
to potential battle of form conflicts. 
25Two contrasting businessmen's views about the value of such forms are worth 
citing. The first was expressed by a CMA respondent in the following language: 
It has been my experience that the mechanics of buying and selling in the 
private sector in inter-company commerce are much the same the country 
over. The basis of the system is the exchange of printed Purchase Order 
Forms and Sales Order Forms. The creation of both forms follows a pre- 
dictable pattern. 

The buyer's system engineer designs the front of the P.O. form such that 
all information required to communicate his needs are stated. His lawyer 
then fills up the back of the form. 

The seller's systems engineer designs the front of the S.O. form such that 
effect may be given the buyer's wishes. His lawyer also fills up the back of 
his form. 

The front of the forms is a manifestation of good communications; the 
back of the forms is a manifestation of what your profession calls the 
adversary system, I believe. 

Fortunately, a conspiracy developed many years ago between Purchasing 
Agents and Sales Managers under which both agreed not to read the back- 
sides of the other's form. Were it not for this layman's conspiracy, the 
economy of Ontario would doubtless be destroyed. 
A second, and less sceptical, view appears in a manual prepared by another 
respondent for the guidance of its staff. This describes the use of standard 
forms as "a practical way of handling thousands of orders per month for 
standard commercial items not involving systems or other special applications". 



82 

been concluded and only "discover" the disparity in the documentary ex- 
changes when the parties are locked in conflict How should the law 
resolve this apparent impasse? 

Anglo-Canadian contract law has traditionally approached the prob- 
lem by holding that, to constitute a completed contract, the forms ex- 
changed must contain no variant terms. When this condition is not satis- 
fied, the document later in time, which could be the seller's confirmation 
or the buyer's purchase order, is not a true acceptance but constitutes a 
counter-offer; that is, unless the additional terms can be treated as pro- 
posals that were not intended to be mandatory in nature. 26 There is, there- 
fore, no binding contract and either party may refuse to continue with 
performance. But if performance has been tendered to and accepted by 
the buyer after the buyer has received the seller's confirmation, the buyer 
is deemed to have accepted the seller's counter-offer, at any rate where the 
seller's confirmation followed receipt of the buyer's order. 27 This proposi- 
tion is sometimes referred to as "the performance rule". 

The draftsmen of Article 2 did not feel that the "mirror image" 28 and 
"last shot" 29 rules of acceptance prescribed by the common law corres- 
ponded with commercial realities. Accordingly, they set out consciously 
to change the common law position, albeit with much agonizing over the 
form of the desirable changes and the language in which they should be 
expressed. The current version of section 2-207 reads as follows: 

(1) A definite and seasonable expression of acceptance or a 
written confirmation which is sent within a reasonable time operates 
as an acceptance even though it states terms additional to or different 
from those offered or agreed upon, unless acceptance is expressly 
made conditional on assent to the additional or different terms. 

(2) The additional terms are to be construed as proposals for 
addition to the contract. Between merchants such terms become part 
of the contract unless: 

(a) the offer expressly limits acceptance to the terms of the 
offer; 

(b) they materially alter it; or 

(c) notification of objection to them has already been given or 
is given within a reasonable time after notice of them is 
received. 



MHyde v. Wrench (1840), 3 Beav. 334; 49 E.R. 132 (Ch.); Harvey v. Perry, 
[1953] 1 S.C.R. 233, especially at 237; and see, further, Fridman, The Law of 
Contract in Canada (1976), pp. 70-71. 

27 Compare, Cor bin on Contracts, Vol. 1, p. 319, and Roto-Lith Ltd. v. Bartlett 
& Co. Inc. (1962), 297 F. 2d 497. For a striking example, in a bailment 
context, of the gamesmanship to which the rule can lead see, British Road 
Services, Ltd. v. Arthur V. Crutchley & Co. Ltd., [1968] 1 All E.R. 811, 
Waddams, Research Paper No. II. 1, pp. 19-22. 

28 That is, the rule that an acceptance must be unqualified and may not deviate 
in any respect from the terms in the offer. 

29 That is, the rule that a counter-offer will be deemed to be accepted if the other 
party acts upon it as, for example, by receiving the goods without objection. 



83 

(3) Conduct by both parties which recognizes the existence of a 
contract is sufficient to establish a contract for sale although the 
writings of the parties do not otherwise establish a contract. In such 
case the terms of the particular contract consist of those terms on 
which the writings of the parties agree, together with any supple- 
mentary terms incorporated under any other provisions of this Act. 

The objectives sought to be attained by these provisions are fairly 
readily discernible. Subsection (1) abolishes the mirror image rule and 
treats a confirmation as an acceptance, even though it stipulates additional 
or different terms. By virtue of subsection (2) the additional, but not 
different, terms are to be construed as proposals for additions to the con- 
tract. Subsection (2) also states the circumstances in which the additional 
terms are deemed to have been accepted by the other party. Subsection 
(3) addresses itself to the legal position where the offeree's communication 
cannot be treated as an acceptance, but the parties have proceeded on the 
assumption that a binding contract exists. In such a case, the conflicting 
terms are to be disregarded, and the contents of the contract are to be 
found in those terms with respect to which the parties are in agreement, 
combined with any supplemental provisions added by the Code. It seems 
clear that the draftsmen rejected the performance rule and wanted to 
deprive the seller of any advantage that might have been conferred on 
him under prior case law because of the fortuitous circumstance that his 
confirmation was later in time than the buyer's purchase order. 

However meritorious the draftsmen's overall objectives may have 
been (and this too is a matter for serious debate), there is general agree- 
ment that section 2-207 is not well drafted and that it raises as many 
issues as it solves. 30 In the colourful language of White and Summers, 31 
the section is in one respect "like the amphibious tank that was originally 
designed to fight in the swamps, but was ultimately sent to fight in the 
desert". Two other learned authors 32 have objected strenuously that "the 
section was apparently drafted without assessing costs and without bal- 
ancing against them the advantages the section might afford". Even its 
friendlier critics admit that the section is "one of the most important, 
subtle, and difficult in the entire Code". 33 

The following are some of the many constructional and conceptual 
problems said to be raised by the section: 

(1) the use of conventional terms to express unconventional ideas; 
in particular, the notion that there can be an acceptance of an 
offer or confirmation of a verbal agreement even though the 
"acceptance" or "confirmation" contains different or additional 
terms from those found in the offer or verbal agreement; 

30Professor Shanker disagrees with the critics. In his view, section 2-207 is a 
"fairly simple, straight-forward, and extraordinarily progressive section": 
Shanker, "Contract by Disagreement!? (Reflections on UCC 2-207)" (1976), 
81 Com. L.J. 453. 

^Supra, footnote 17, p. 24. 

32 Friedman & Macau! ay, "Contract Law and Contract Teaching: Past, Present, 
and Future", [1967] Wis. L. Rev. 803, 818, cited in Waddams, Research Paper 
No. II.l, p. 72. 

33 Duesenberg and King, footnote 23 supra, p. 3-12. 



84 

(2) the meaning of the words "definite and seasonable expression 
of acceptance" in subsection ( 1 ) ; 

(3) the difficulty of distinguishing between "additional" and "dif- 
ferent" terms for the purpose of applying subsections (1) and 
(2); 

(4) the need for an offeree to condition his acceptance upon express 
assent to different or additional terms contained in his response, 
when no requirement is imposed on the offeror to indicate his 
objections to such variant terms, except in the case of non- 
material additions; and, 

(5) the hardship imposed by subsection (3) in depriving sellers of 
the protection of disclaimer clauses in their forms because of 
the existence of conflicting writings, especially in cases where 
the goods have been shipped to and accepted by the buyer. 

During the course of this Project, a research paper was prepared that 
subjected the provisions of section 2-207 to a searching examination. 34 
The research paper reached the conclusion that many of the criticisms 
were valid. 35 

The Commission agrees with the Research Team that section 2-207 
is not satisfactory in its existing form, and that more than cosmetic changes 
are necessary in order to find acceptable solutions to the great variety of 
problems endemic in the "battle of the forms" phenomenon. With one 
exception, therefore, we do not recommend adoption of the section, al- 
though this recommendation is not intended to preclude further study of 
the whole problem by the Law of Contract Amendment Project. The ex- 
ception involves subsection (3), which we would incorporate in the re- 
vised Act. 36 

Our reasons are as follows. So long as the "agreement" is still exe- 
cutory and the parties have not proceeded beyond the exchange of forms, 
there is no undue hardship in applying existing rules of offer and accep- 
tance and finding that there is no concluded agreement between the 
parties. The "mirror image" rule of acceptance may enable one or the 
other party to escape from a bargain that he no longer finds to his liking, 
but such cases do not appear to arise often in practice. In any event, it is 
always open to a court to find that the offeree did not intend to reject the 
offer, and that the variant terms in the response, if minor in character, 
were only in the nature of suggestions. 

It is different once the parties have proceeded to act as if there were 



34 Waddams, "The Effect of Unsigned Writings in the Formation of Sales Con- 
tracts: The Battle of Forms' and Related Questions", Research Paper No. II. 1. 

35 To some extent Professor Waddams goes further, since he finds the changes 
from existing Anglo-Canadian concepts of offer and acceptance so radical as 
to be totally unacceptable. He therefore opposes the adoption of the section, 
both in form and in substance, in a revision of the Ontario Act. He appears to 
feel that the courts are capable of resolving problems that arise from the use 
of conflicting forms and of avoiding hardship to the buyer through the use of 
constructional techniques and evolving doctrines of unconscionability. 

36See, Draft Bill, Section 4.2(3). 



85 

a binding contract. Unless one were to argue that the transaction was a 
nullity, or at least voidable, on the grounds of mutual mistake (a proposi- 
tion that few have entertained seriously), the court must construct the 
terms of the bargain on some realistic basis. This is what UCC 2-207(3) 
attempts to do. It is not realistic to say that, because the last document 
in the exchange of writings contained the seller's disclaimer clause, or 
other variant terms, the buyer must therefore be deemed to have assented 
to them when he accepted the goods. 37 The assumption would be clearly 
fictitious if the buyer's order form had rejected in advance any deviations 
not approved by him in writing. Should it make a difference that he did 
not exercise this measure of foresight? Suppose the sequence of events 
were altered so that the buyer's purchase form, containing a stipulation for 
an express warranty or other variant term, was received by the seller be- 
fore he shipped the goods, but after he had dispatched his original offer 
containing the disclaimer clause. Would the seller still willingly subscribe 
to the performance rule? As American authors have noted, 38 faced with 
intractable patterns of business behaviour the best solution is for the law 
to adopt an attitude of evenhandedness, as the Code does. If sellers and 
buyers do not like the results, they can avoid them by insisting on explicit 
acceptance of their terms. 

In rejecting the performance rule, we do not wish to leave the impres- 
sion that the court should ignore the parties' conduct after, or before, the 
exchange of their inconclusive writings. We only argue that any conclu- 
sion should be based on persuasive evidence and not fictitious assumptions. 
The difference between these approaches can be illustrated with the aid 
of two American decisions, both decided under the Code. 

In the first, Roto-Lith Ltd. v. Bartlett & Co., 39 the buyer sent the 
seller a written order for a drum of emulsion to be used by the buyer in its 
manufacture of cellophane bags for the packaging of vegetables. The order 
stated: "End use: wet pack spinach bags". The seller's acknowledgment 
form, which it was assumed reached the buyer before the emulsion, con- 
tained a disclaimer of all express and implied warranties. The emulsion 
turned out to be defective and the buyer sued the seller for breach of 
warranty. The First Circuit Court of Appeals, in a much criticized deci- 
sion, applied pre-Code reasoning and held that, since the buyer accepted 
the goods with presumptive knowledge of the conditions in the seller's 
acknowledgment, it was bound by the disclaimer provisions. 

In the second case, Construction Aggregates Corp. v. Hewitt-Robins 

37 See, Shanker, footnote 30 supra, at p. 454, n. 13: 

. . . there is a vast distinction (which the common law courts seemed to 
have overlooked) between one who receives goods from an original offer as 
opposed to one who receives goods under a counter offer. Most important, 
the recipient who receives goods under a counter offer simply has not re- 
ceived them in silence. Quite to the contrary, he originally was an offeror 
himself. And, in that original and prior offer, he loudly and clearly mani- 
fested the contractual terms which he expected and would agree to. Thus, 
to place this recipient in the same legal posture as the recipient who never 
had said anything during the transaction just plain ignores the actual facts. 

38 White & Summers, footnote 17 supra, p. 25. 

39(1962), 297 F. 2d 497. 



86 

Inc., 40 the buyer again forwarded a purchase order to the seller. The seller 
signed and returned the order, together with a covering letter stating that 
acceptance was expressly conditioned upon assent to the modified war- 
ranty provision set out in the letter and certain changes in the payment 
terms. Following receipt of the letter, the buyer's corporate treasurer 
telephoned the seller objecting to the payment terms in the covering letter 
but saying nothing about the variations in the warranty provisions. The 
Court held that the buyer's objection to the payment terms could reason- 
ably be construed as acquiescence in the remaining terms of the counter- 
offer. While this decision has also been criticized, it can, in our view, be 
justified. The difference between the two cases is that, while in the Roto- 
Lith case there was no evidence of acceptance of the seller's variant terms, 
beyond the fact of the buyer's receipt of the goods, there was at least some 
independent evidence of acceptance in the Construction Aggregates case. 

We appreciate that the dividing line may be thought to be a fine one; 
nevertheless, we believe it to be real. We therefore recommend a solution 
based upon persuasive evidence as evinced by the conduct of the parties. 
Accordingly, we have included in the Draft Bill an almost verbatim ver- 
sion of UCC 2-207 (3). 41 

(c) SALES BY AUCTION 

Section 56 of the Ontario Sale of Goods Act codifies some important 
common law rules involving sales by auction. The section reads as follows: 

In case of a sale by auction, 

(a) where goods are put up for sale in lots, each lot is prima facie 
the subject of a separate contract of sale; 

(b) a sale is complete when the auctioneer announces its completion 
by the fall of a hammer or in any other customary manner, and 
until such announcement is made any bidder may retract his 
bid; 

(c) where a sale is not notified to be subject to a right to bid on 
behalf of the seller, it is not lawful for the seller to bid himself 
or employ a person to bid at such sale, or for the auctioneer 
knowingly to take any bid from the seller or any such person, 
and any sale contravening this rule may be treated as fraudu- 
lent by the buyer; 

(d) a sale may be notified to be subject to a reserved or upset price, 
and a right to bid may also be reserved expressly by or on be- 
half of the seller; 

(e) where a right to bid is expressly reserved, but not otherwise, 
the seller, or any one person on his behalf, may bid at the 
auction. 



40(1968), 404 F. 2d 505, discussed in Duesenberg and King, footnote 23 supra, at 

pp. 3-79 et seq. 
4iSee, Draft Bill, Section 4.2(3). 



87 

With one important addition, the Uniform Sales Act substantially repro- 
duced the British provisions, upon which section 56 of the Ontario Act 
is based. This addition, contained in section 21(2) of the Uniform Sales 
Act, involved the binding nature of an auction held without reserve. 
Section 2-328 of the Code has retained this addition and made several 
other changes. The section reads: 

(1) In a sale by auction if goods are put up in lots each lot is the 
subject of a separate sale. 

(2) A sale by auction is complete when the auctioneer so announces 
by the fall of the hammer or in other customary manner. Where 
a bid is made while the hammer is falling in acceptance of a 
prior bid the auctioneer may in his discretion reopen the bidding 
or declare the goods sold under the bid on which the hammer 
was falling. 

(3) Such a sale is with reserve unless the goods are in explicit terms 
put up without reserve. In an auction with reserve the auctioneer 
may withdraw the goods at any time until he announces comple- 
tion of the sale. In an auction without reserve, after the auc- 
tioneer calls for bids on an article or lot, that article or lot 
cannot be withdrawn unless no bid is made within a reasonable 
time. In either case a bidder may retract his bid until the auc- 
tioneer's announcement of completion of the sale, but a bidder's 
retraction does not revive any previous bid. 

(4) If the auctioneer knowingly receives a bid on the seller's behalf 
or the seller makes or procures such a bid, and notice has not 
been given that liberty for such bidding is reserved, the buyer 
may at his option avoid the sale or take the goods at the price 
of the last good faith bid prior to the completion of the sale. This 
subsection shall not apply to any bid at a forced sale. 

The important differences between the Code provision and section 56 are 
the following: 

(1) Section 2-328(2) provides that, where a bid is made while the 
hammer is falling in acceptance of a prior bid, the auctioneer 
may in his discretion reopen the bidding or declare the goods 
sold under the bid on which the hammer was falling; 

(2) The last sentence of section 2-328(3) provides expressly that 
retraction of a bid does not revive any previous bid; 

(3) Under the Code, it is specifically provided that, unless goods 
are expressly stated to be put up without reserve, a sale is 
deemed to be with reserve; 42 

(4) The binding nature of an auction without reserve, previously 
declared in section 21(2) of the Uniform Sales Act, is reaf- 
firmed; 43 



42See, UCC 2-328(3), 1st sentence. 
43See, UCC 2-328(3), 3rd sentence. 



88 

(5) Where the seller has made an undisclosed bid, the buyer's op- 
tions are enlarged: he may either avoid the sale or "take the 
goods at the price of the last good faith bid prior to the com- 
pletion of the sale"; 44 and, 

(6) The rule forbidding the seller to participate in the bidding with- 
out disclosure does not apply to a forced sale. 45 

The first difference deals with an esoteric question which, so far as 
we have been able to ascertain, has not led to any reported litigation in 
England or Canada. We do not, therefore, see any justification for copy- 
ing this feature of UCC 2-328. The second difference, while not found in 
section 56, is declaratory of the common law 46 and could, we think, be 
usefully adopted. The third difference, if in fact there is a difference, 
raises a point of policy. A literal reading of section 56(d) of the Ontario 
Act might lead to the inference that the burden rests on the auctioneer 
to make clear whether the sale is with or without reserve and that, if 
nothing is said, it will be assumed to be without reserve. This inference 
is not justified, and section 56(d) is in fact concerned with a very dif- 
ferent question: namely, whether there is a binding sale where the auc- 
tioneer has accepted a bid below the reserve price. 47 Even in the absence 
of a reserve price, the accepted rule 48 is that the auctioneer does not 
promise to accept the highest bid except, possibly, where the auction sale 
is advertised as being "without reserve". UCC 2-328(3) codifies this 
common law rule. 

We have considered whether the rule should be reversed and a statu- 
tory presumption introduced that an auction is deemed to be without 
reserve unless the contrary is indicated. We have been persuaded, however, 
that such a presumption could cause hardship in the case of a non-pro- 
fessional auctioneer, as, for example, a farmer disposing of surplus goods, 
who might not be familiar with the new statutory rule. We do not, there- 
fore, recommend any change in the law on this point, and our Draft Bill 
codifies the common law rule. 49 

The fourth difference relates to the binding character of a promise to 
hold an auction without reserve. We support the Code provision in this 
respect. The common law position is unsettled 50 and legal scholars have 
debated whether consideration exists to support the enforceability of such 
a provision. 51 Section 2-328(3) gives a welcome quietus to these doubts. 

44See, UCC 2-328(4). 

^Ibid., last sentence. 

46Treitel, The Law of Contract (4th ed., 1975), p. 8. 

WMcManusv. Fortescue, [1907] 2 K.B. 1 (C.A.). 

48 As implied from Warlow v. Harrison (1859), El. and El. 295, 120 E.R. 920 
(Exch. Ch.), and the rule that a request for bids is only an invitation to treat: 
British Car Auctions Ltd. v. Wright, [1972] 1 W.L.R. 1519 (Q.B.). 

49Two of the Commissioners, the Honourable Richard A. Bell and the Honour- 
able J. C. McRuer, dissent from this recommendation. They would reverse the 
rule and provide that all auctions shall be deemed to be without reserve unless 
the contrary is indicated. 

50 See Treitel, footnote 46 supra, pp. 91-92; and compare, Holder v. Jackson 
(1862), 11 U.C.C.P. 543, 546, per Draper, CJ. 

51 See the discussion between Slade and Gower in "Auction Sales of Goods with- 
out Reserve" (1952), 68 L.Q.R. 238, 457 and (1953), 69 L.Q.R. 21; and 
Hickling, "Auctions without Reserve" (1970), 5 U.B.C. L. Rev. 187. 



89 

Section 2-328(4), which contains the fifth difference, gives rise to 
greater difficulties. Section 56(c) of The Sale of Goods Act allows the 
deceived buyer to treat the seller's undisclosed bid as a fraudulent act, 
but nothing is said about the remedies open to a buyer in such a 
case. The purpose of the Code provision appears to be to facilitate the 
quantification of the buyer's damages. 52 This may be regarded as a desir- 
able goal, but it is not clear how the statutory formula would work in 
practice. There are constructional difficulties inherent in the section. 53 

Given these difficulties, we do not feel it would be wise to copy this 
feature of section 2-328. We do, however, favour some clarification of the 
buyer's rights where the seller has made a secret bid. The case law en- 
titles the buyer to avoid the sale, 54 but apparently there is no authority 
entitling him to affirm the contract and claim damages, or to claim dam- 
ages even though he has avoided the sale. In principle we see no reason 
why he should not be entitled to claim damages in both types of case, and 
we so recommend. 55 We also favour allowing the buyer to recover dam- 
ages in the form of an abatement in the price where he has not yet paid 
for the goods. 

We turn, finally, to the sixth difference; that is, the exception to the 
prohibition against a seller's secret bid recognized in section 2-328(4) in 
the case of a forced sale. We support this exception on the ground that 
since the owner of the goods has not requested their sale, he is not a 



52 See, State of New York, Report of the Law Revision Commission for 1955: 
Study of the Uniform Commercial Code, Vol. 1, p. (444) (hereinafter referred 
to as the "NYLRC Study"). 

53A learned commentator, Professor Honnold, basing himself on an earlier ver- 
sion of subsection (4), offers, in the NYLRC Study supra, the following 
example. Suppose that the bidding for an article between buyer, B, third party, 
T, and undisclosed seller, S, proceeds as follows: 



B - 


- $45 


T - 


- $50 


S - 


- $55 


B - 


- $60 


S - 


- $65 


B - 


- $70 



Which of these bids constitutes "the last good faith bid prior to the completion 
of the sale"? Presumably it is B's bid at $60, but would this reduction in the 
price adequately compensate B? B might argue that, but for S's intervention, he 
might have stood a better than average chance to obtain the article at $55. A 
similar difficulty would arise if, in the above example, B and S had been the 
only bidders. B might then feel that the goods would have been his for $45. 
On the other hand, the statutory formula could cause hardship to S if the 
following sequence of bids is assumed: 

B — $45 

T — $50 

S — $55 

B — $60 
In this example, B's "last good faith bid prior to completion of the sale" 
occurred at $45, but it would not appear to be right to allow him to retain 
the goods at this price. The difficulty could be overcome by reading the statu- 
tory word to encompass a good faith bid by any bidder, whether he is the 
ultimate buyer or another person. But this reading could create new anomalies. 
54 See, for example, F easier Trucking Service, Inc. v. Parks-Davis Auctioneers, 

Inc. (1973), 505 P. 2d 612 (Kan. Sup. Ct.). 
55See, Draft Bill, s. 4.5(9). 



90 

"seller" and that a bid by him does not involve the mischief present in a 
secret bid in a voluntary sale. 

In the light of the foregoing discussion, the Commission recommends 
the adoption of the following provisions in place of section 56 of The Sale 
of Goods Act: 

4.5. — (1) Where goods are put up for sale by auction in lots, each 
lot is the subject of a separate sale. 

(2) A sale by auction is complete when the auctioneer so 
announces by the fall of the hammer or in any other 
customary manner. 

(3) A sale by auction is with reserve unless the goods are put 
up without reserve. 56 

(4) In an auction with reserve, the auctioneer may withdraw 
the goods at any time until he announces completion of 
the sale. 

(5) In an auction without reserve, after the auctioneer calls 
for bids on an article or lot, that article or lot cannot be 
withdrawn unless no bid is made within a reasonable time. 

(6) In an auction with or without reserve the bidder may 
retract his bid until the auctioneer's announcement of 
completion of the sale, but a bidder's retraction does not 
revive any previous bid. 57 

(7) A right to bid may be reserved expressly by or on behalf 
of the seller. 

(8) Where a seller has not reserved the right to bid, it is not 
lawful, except in the case of a forced sale, for the seller 
to bid himself or to employ a person to bid at such sale, 
or for the auctioneer knowingly to take any bid from the 
seller or any such person. 

(9) Where subsection 8 is contravened, the buyer may treat 
the sale as fraudulent and may avoid the sale and recover 
damages, or may affirm the sale and recover damages or 
claim an abatement in the price. 

4. Consideration 58 

The shortcomings of various facets of the law of consideration have 
long been the subject of adverse comment by courts, textwriters, and law 

56 See the dissent by two Commissioners in footnote 49, supra. 
57 One of the Commissioners, the Honourable Richard A. Bell, does not agree 
with this subsection and would wish it to read: 

(6) In an auction with or without reserve, the bidder may retract his bid 

until the auctioneer's announcement of the completion of the sale, 

but the auctioneer may continue the sale with the bidding then starting 

with that of the next highest bidder who is prepared to renew his bid. 

58See, Myers, "The Law of Consideration", Research Paper No. II. 2. 






91 

reform bodies. In 1937, the Sixth Interim Report of the Law Revision 
Committee 59 made a substantial number of proposals, several of which, if 
adopted, would change fundamentally the basis for the enforceability of 
promises. While sympathizing with many of the Committee's criticisms of 
the existing doctrine, we are of the view that a comprehensive review of 
the law of consideration should constitute the object of a separate study, 
and that a revised Sale of Goods Act should limit itself to those shortcom- 
ings that experience shows to be particularly important in the sales area. 
This is true of the role of consideration in connection with firm offers and 
the modification of contractual rights and duties. We therefore turn to 
consider these facets. 

(a) FIRM OFFERS 

It is elementary law that a promise to keep an offer open for accep- 
tance for a prescribed or reasonable period is not binding unless sup- 
ported by consideration or unless it is made under seal. It is also well 
settled Anglo-Canadian law that the doctrine of injurious reliance or 
promissory estoppel does not assist the offeree who has acted to his 
detriment in good faith reliance on the firm offer, because the doctrine 
can only be used as a shield and not as a sword. 60 The Law Revision Com- 
mittee strongly criticized the rule as being opposed to sound commercial 
morality and recommended its reversal. 61 In a recently published Working 
Paper on Firm Offers 62 the English Law Commission has reached the 
same, albeit tentative, conclusion and has made some proposals of its 
own. We agree with both these bodies, and would only add that the bind- 
ing character of firm offers is widely accepted in other legal systems 63 as 
well as in the Hague Uniform Law on Formation 64 and the revised version 
of that law prepared by UNCITRAL. 65 In the common law world, the 
common law rule has been reversed, inter alia, in New York's General 
Obligations Law, 66 as well as in UCC 2-205. We therefore turn our at- 
tention to the formulation of the rule making firm offers enforceable even 
though not supported by consideration. 

The following precedents will serve as a useful basis for the questions 
that need to be answered: 

Uniform Commercial Code, Section 2-205: 

An offer by a merchant to buy or sell goods in a signed writing 
which by its terms gives assurance that it will be held open is not 



59 Law Revision Committee, Sixth Interim Report (Statute of Frauds and the 
Doctrine of Consideration) (1937), (Cmd. 5449); Myers, supra, pp. 46-47. 

GQCombe v. Combe, [1951] 2 K.B. 215 (C.A.); Combe v. Combe did not in- 
volve a firm offer. 

^Supra, footnote 59, para. 38. 

62 Law Commission, Working Paper No. 60, Firm Offers (1975). 

^Corbin on Contracts, Vol. 1, sec. 46. 

64Article 5. 

65 UNCITRAL, Eleventh Session, Report of the Working Group on the Inter- 
national Sale of Goods on the Work of its Ninth Session, A/CN.9/128, Annex 
1, art. 10(2), Jan. 6, 1975. 

66 N.Y. General Obligations Law, art. 5-1109 (McKinney). 



92 

revocable, for lack of consideration, during the time stated or if no 
time is stated for a reasonable time, but in no event may such period 
of irrevocability exceed three months; but any such term of assur- 
ance on a form supplied by the offeree must be separately signed by 
the offeror. 

New York General Obligations Law, Article 5-1109: 

Written irrevocable offer. Except as otherwise provided in section 
2-205 of the uniform commercial code with respect to an offer by a 
merchant to buy or sell goods, when an offer to enter into a contract 
is made in a writing signed by the offeror, or by his agent, which 
states that the offer is irrevocable during a period set forth or until a 
time fixed, the offer shall not be revocable during such period set 
forth or until such time because of the absence of consideration for 
the assurance of irrevocability. When such a writing states that the 
offer is irrevocable but does not state any period or time of irrevoc- 
ability, it shall be construed to state that the offer is irrevocable for a 
reasonable time. 

Uniform Law on Formation, Article 5: 

1 . The offer shall not bind the offeror until it has been communi- 
cated to the offeree; it shall lapse if its withdrawal is communicated to 
the offeree before or at the same time as the offer. 

2. After an offer has been communicated to the offeree it can be 
revoked unless the revocation is not made in good faith or in con- 
formity with fair dealing or unless the offer states a fixed time for 
acceptance or otherwise indicates that it is firm or irrevocable. 

3. An indication that the offer is firm or irrevocable may be ex- 
press or implied from the circumstances, the preliminary negotia- 
tions, any practices which the parties have established between them- 
selves or usage. 

4. A revocation of an offer shall only have effect if it has been 
communicated to the offeree before he has despatched or has done 
any act treated as acceptance under paragraph 2 of Article 6. 

It will be seen that the questions that arise for decision are the 
following: (i) Who should be bound? (ii) For what period? (iii) Should 
writing be a condition of enforceability? (iv) How explicit must be the 
language of the offer? (v) Can irrevocability be implied from usage or 
course of dealing? and, (vi) What remedies should be available? We shall 
address each of these questions in turn. 

(i) Who should be bound? UCC 2-205 restricts its application to 
firm offers made by merchants. The New York provision, on the other 
hand, is not so restricted. The English Law Commission 67 favoured the 
Code approach on the ground that it is consistent with the higher duties 
imposed in the Sale of Goods Act on a merchant seller. It may be 



67 Supra, footnote 62, paras. 30-31, 



93 

argued that this does not explain why a firm offer should not also bind 
a non-merchant seller or buyer, assuming it is made freely and without 
unfair advantage being taken of the offeror. We have not been presented 
with any evidence that firm offers, not supported by consideration, are a 
significant feature in non-merchant sale transactions. We can see the 
merit of the argument that firm offers should be enforceable without re- 
striction as to the character of the offeror; but, in our view, this argument 
merits more detailed consideration, which may be undertaken in the con- 
text of a general reform of the law of consideration. We therefore support 
the Code position, and our Draft Bill so provides. 68 We would stress that 
this recommendation is not intended to preclude further study of the 
whole problem by the Law of Contract Amendment Project. 

(ii) For what period? Comment 2 to section 2-205 of the Uniform 
Commercial Code justifies restricting the binding character of a firm 
offer to three months on the ground that the section was intended to 
apply to current firm offers and not to long term options. In the case of 
offers for a specified period, the English Law Commission was of the 
view that a short period could be a trap for the unwary; but they also 
felt that it would be inconvenient for offerors and their executors to be 
bound for very long periods of time. The Law Commission favoured 69 a 
cut-off point corresponding to the limitation period for bringing an action 
founded on simple contract, that is, six years, with the result that "a 
promise of non-revocation that was expressed to run for a longer period 
should cease to be binding after six years". We have reached a somewhat 
different conclusion. It appears to us that a merchant is quite capable of 
determining his own best interest, and that he should be free to set his 
own period of time, whether it is for more or less than six years. A firm 
offer that was expressed to remain open for more than six years would 
no doubt be a very unusual occurrence, but we see no overriding public 
policy that militates against its effectiveness. If it has been procured by 
improper means, the problem can be dealt with under other heads. Again, 
we see no justification, in terms of its effective duration, in drawing a 
distinction between a firm offer supported by consideration and an offer 
made without consideration. In. the light of these factors, we have con- 
cluded that the revised Act should not impose a limit on the effectiveness 
of an offer expressed to remain open for a specified period, and so 
recommend. 

With respect to firm offers for an unspecified period, the Law 
Commission's Working Paper takes yet another approach. The Law 
Revision Committee was of the view that a firm offer for an unspecified 
period should not fall within the rule making firm offers enforceable 
even though not supported by consideration. The Working Paper reaches 
the same conclusion on the ground that "the need for certainty outweighs 
the other considerations". 70 We are not persuaded by this reasoning. It 
is well settled law that a simple offer is open for acceptance for a reason- 
able period, unless the offer provides otherwise. It is difficult to see why 



68See, Draft Bill, s. 4.3. 

6 9Law Commission, Working Paper No. 60, Firm Offers (1975), paras. 32-33. 

Wlbid., para. 34. 



94 

a different rule of construction should be applied to firm offers, or why 
it should create greater uncertainty than in the case of ordinary offers. 
As will have been noted, neither the Code nor, it would seem, the 
Uniform Law on Formation distinguishes, in this context, between firm 
offers for a stated duration and firm offers for an unspecified period. 
Nevertheless, in order to accommodate, to some extent, the Law Com- 
mission's apprehensions, we recommend that, where the offer states no 
time for its duration, it shall remain irrevocable for a reasonable time 
not to exceed three months. 71 

(iii) Should writing be a condition of enforceability? This question 
is answered affirmatively both in the Code and in the New York provi- 
sions. The English Law Commission's Working Paper on Firm Offers, 
however, reaches the opposite conclusion 72 on the grounds of hardship 
to a non-business person, who might not appreciate the importance of 
obtaining the offer in writing or might be unwilling to press for a written 
offer. A majority of this Commission 73 agrees with the English Law 
Commission. We have, however, adopted this position on grounds that 
are broader than those stated by the Law Commission. As will be 
seen below, we favour the abolition of a Statute of Frauds requirement 
for sales contracts in general. 74 The only meaningful distinction that 
can be drawn between the evidentiary requirements for the enforce- 
ment of a sales contract and the enforcement of a firm offer, is the 
presence of consideration in the first case and the absence of it in the 
second. However, this distinction disappears once it is appreciated that 
the offeror usually has a sound business reason for his willingness to 
make the firm offer, or that he may be following an established business 
practice. It might be argued that writing could also be regarded as a sub- 
stitute for consideration; this reasoning appears, at least in part, to under- 
lie the Code requirement in the case of firm offers 75 and is influenced by 
the fact that many American jurisdictions have abolished the use of 
seals. Whether writing should serve this office in the law of consideration 
raises an important question well outside our terms of reference and we 
do not pursue it here. 

(iv) How explicit must be the language of the offer? Section 2-205 
of the Code refers to an offer which by its terms "gives assurance" that 
it will be held open. Apparently the quoted words were intended 76 to 
convey the requirement of an open offer made with serious intent. The 
intention to enter into a legally enforceable bargain is a prerequisite 
to all offers, and we do not think it has to be spelled out separately. 



7iSee, Draft Bill, s. 4.3. 

12 Supra, footnote 69, paras. 35-38. 

73Two of the Commissioners, the Honourable J. C. McRuer and Mr. W. Gibson 

Gray, dissent from the views of the majority and would require firm offers not 

supported by consideration to be in writing. 

I^Infra, this chapter, section 6. 

75 Compare, Restatement of the Law, Contracts 2d, footnote 12 supra, s. 89B, 
Comment d. 

76See, UCC 2-205, Comment 2. 



95 

We believe it sufficient to say that the offer must "expressly" provide 
that it will be held open for acceptance, and we so recommend. 

(v) Can irrevocability be implied from usage or course of dealing? 
The requirement of an explicit promise necessarily leads to the conclu- 
sion 77 that a promise implied from the surrounding circumstances cannot 
constitute a firm offer enforceable in the absence of consideration. The 
English Law Commission was of the view 78 that an attempt to distinguish 
between express and implied promises would cause more difficulties than 
it prevented. Moreover, we recognize that the distinction is not drawn in 
the Uniform Law. Nevertheless, we favour an incremental approach, and 
therefore recommend no change in the Code precedent until such time 
as a complete review has been undertaken of the role of consideration 
in our law. 

(vi) What remedies should be available? It will be obvious from 
the preceding discussion that a firm offer that meets the requirements of 
the revised Act gives rise to a contractual obligation. 79 However, this 
characterization does not answer the question of the remedies that 
should be available to the aggrieved party where the offeror wrongfully 
repudiates the firm offer before its acceptance. This question is not ex- 
plicitly answered in the American provisions, but is extensively canvassed 
in the English Law Commission's Working Paper. 80 The Working Paper 
points out that the alternatives are between treating the wrongful revoca- 
tion as a nullity and treating it as a cause of action. If we interpret the 
Commission's reasoning correctly, they would favour giving the innocent 
party the right to elect either remedy on the ground that this corresponds 
to the remedies available in other cases of anticipatory repudiation of a 
contractual promise. We do not support this approach entirely. As will be 
seen from a later part of this Report, 81 we favour the abolition of the 
doctrine of election with respect to anticipatory breaches. If this recom- 
mendation is adopted, consistency suggests similar treatment of the rights 
of the injured party where an offeror wrongfully revokes his offer. How- 
ever, no separate provision is necessary to reach this result, since it will 
necessarily follow from the general provisions in the revised Act dealing 
with the consequences of acts of anticipatory repudiation. 

In addition to the above questions, some reference should be made 
to the doctrine of injurious reliance. The Law Commission's Working 
Paper refers 82 to this doctrine, which has been applied by some American 
courts to prevent revocation of an offer, not otherwise expressed to be 
irrevocable, where the offeror should have anticipated detrimental reli- 
ance on the offer by the offeree. A provision to this effect appears in 
section 89B of the Tentative Draft of the Second Restatement on Con- 



77 Compare, ibid., last sentence. 

78Law Commission, footnote 69 supra, para. 34. 

79See the definition of "contract" in s.l.l(l)7 of the Draft Bill. 

^Supra, footnote 69, paras. 41-50. 

^Infra, ch. 18, section 4. 

82 Supra, footnote 69, paras. 51-54. 



96 

tracts. 82 The doctrine has obvious merit but, once again, raises much 
broader issues that are more appropriately discussed in the context of 
a Law of Contract Amendment Project. 

(b) CONTRACTUAL MODIFICATIONS 

(i) The Existing Position 

As the replies to the C.M.A. Questionnaire illustrate, 84 modifications 
made to the terms of the contract after its initial conclusion are quite 
common. The modifications may involve price, quantity, specifications 
or delivery dates. Among manufacturers, at least in normal times, modi- 
fications in the terms of delivery appear to head the list, but the fre- 
quency and types of modifications may well vary among other segments 
of the business community. In inflationary times, or in periods of shor- 
tages, the pressure for substantial modifications is particularly strong. One 
might have thought that the common law would have been content to 
respect a familiar business phenomenon without fettering it with the 
restrictive requirements of the doctrine of consideration. Such an attitude 
could reasonably be justified in terms of the difference between requiring 
consideration to support the enforceability of an original promise, and 
recognizing a freely and fairly adopted modification once the bargain 
has been struck. 85 

In fact, subject to the statutory and common law exceptions to be 
mentioned below, our law draws no such distinction. Instead we have 
the rule in PinneVs Case 86 and the equally well entrenched doctrine 

8 3Section 89B provides: 

( 1 ) An offer is binding as an option contract if it 

(a) is in writing and signed by the offeror, recites a purported consid- 
eration for the making of the offer, and proposes an exchange on 
fair terms within a reasonable time; or 

(b) is made irrevocable by statute. 

(2) An offer which the offeror should reasonably expect to induce action or 
forbearance of a substantial character on the part of the offeree before 
acceptance and which does induce such action or forbearance is bind- 
ing as an option contract to the extent necessary to avoid injustice. 

8 *See, Fisher, Research Paper No. 1.2, Part IV, pp. 35-37. 

85 As the New Hampshire court observed in Watkins & Son, Inc. v. Carrig 
(1941), 21 A. 2d 591, (see, Duesenberg & King, footnote 23 supra, p. 4-34, 
n. 9): 

... In common understanding there is, importantly a wide divergence 
between a bare promise and a promise in adjustment of a contractual 
promise already outstanding. A promise with no supporting consideration 
would upset well and long-established human inter-relations if the law did 
not treat it as a vain thing. But parties to a valid contract generally under- 
stand that it is subject to any mutual action they may take in its perform- 
ance. Changes to meet changes in circumstances and conditions should be 
valid if the law is to carry out its function and service by rules conform- 
able with reasonable practices and understandings in matters of business 
and commerce. 
S6(1602), 5 Co. Rep. 266, 77 E.R. 1177 (K.B.). The rule is that a seller is not 
bound by a promise to accept part payment in satisfaction of a debt. But pay- 
ment of a lesser sum at a different place or at an earlier time or by a different 
method will discharge the debt, if made for the benefit of the seller: See, Ben- 
jamin's Sale of Goods (1974), para. 691. See, also, Myers, Research Paper 
No. II.2, pp. 25 et seq. 



97 

that a promise in exchange for a promise to perform an existing con- 
tractual duty owing to the promisor is unenforceable if not supported by 
consideration. 87 This requirement of consideration is subject to the fol- 
lowing exceptions: 

( 1 ) The doctrine of waiver. This doctrine is of common law origin 
and its precise boundaries are unclear. 88 Its mitigating effects appear, 
however, to be restricted to modifications involving the mode of per- 
formance, and do not include a change or abandonment of the 
parties' substantive rights. Moreover, a waiver has no contractual 
effect and can be retracted if reasonable notice is given to the party 
for whose benefit it was originally granted. 

(2) The doctrine of promissory or equitable estoppel. The origins 
of this equitable doctrine are usually traced to the decision of the 
House of Lords in Hughes v. Metropolitan Railway Co. 89 The doc- 
trine remained largely dormant, however, until it was revived by 
Denning, J., as he then was, in his well-known judgment in Central 
London Property Trust Ltd. v. High Trees House, Ltd. 90 The doc- 
trine provides that a promise intended to modify legal relationships, 
including of course contractual relationships, intended to be acted 
upon and in fact acted upon, will bind the promisor until he gives 
notice of the retraction of his promise. The doctrine, therefore, has 
some serious limitations. First, it does not create a new cause of ac- 
tion where none existed before. It is a defensive shield and not an 
offensive sword. 91 As a result the doctrine does not assist the plaintiff 
in the "duty" cases, 92 as, for example, where a seller seeks to enforce 
a buyer's promise to pay more than was agreed upon in the original 
contract. Secondly, the doctrine is probably only suspensory in char- 
acter and does not preclude the promisor from changing his mind, 
even though his initial promise may have been unqualified. 93 Thirdly, 
although the point is not beyond doubt, it appears that the promisee 
must be able to show detrimental reliance on the promise. 94 

87 Myers, supra, pp. 18-20; and see now, also, Gilbert Steel Ltd. v. University 
Construction Ltd., [1973] 3 O.R. 268, 36 D.L.R. (3d) 496 (H.C.J.), aff'd 
(1976), 12 O.R. (2d) 19, 67 D.L.R. (3d) 606 (C.A.). See, also, Reiter, 
"Courts, Consideration and Common Sense" (1977), 27 U.T.L.J. 439. 

88 Benjamin, footnote 86 supra, paras. 878-79; Treitel, footnote 46 supra, pp. 
75-77; Hartley v. Hymans, [1920] 3 K.B. 475; Charles Rickards Ltd. v. Oppen- 
heim, [1950] 1 K.B. 616 (C.A.). 

8 9 (1877),2 A.C. 439. 

90[1947] K.B. 130; see, also, Myers, Research Paper No. II.2, pp. 32 et seq. 

MCombe v. Combe, [1951] 2 K.B. 215 (C.A.). See, also, Tudale Exploration 
Limited v. Bruce and Teck Mining Group Limited (1978), 20 O.R. (2d) (Div. 
Ct.). 

92Duty cases are those cases where a plaintiff contracting party seeks to enforce 
a promise by the other contracting party to vary the terms of the contract to 
the plaintiff's advanage if he, the plaintiff, will perform his existing contractual 
obligations. 

9 3See, Chitty, The Law of Contracts (24th ed., 1977), Vol. I, paras. 198 et seq., 
and Treitel, footnote 46 supra, p. 78. But see, Cheshire and Fifoot, The Law 
of Contract (8th ed., 1972), at p. 90, and Fridman, The Law of Contract in 
Canada (1976), at p. 193, n. 51, which suggest that the question of whether 
promissory estoppel suspends or abrogates the promisor's legal rights is still the 
subject of controversy. 

9 4Treitel, footnote 46 supra, pp. 79-80. 



98 

(3) The Mercantile Law Amendment Act, section 16. This provision 
was first enacted in 1885 as section 6 of The Administration of Jus- 
tice Act 95 and was intended to relieve against the hardship of the rule 
in Pinner s Case. Section 6 now appears as section 16 of The Mer- 
cantile Law Amendment Act 96 and reads as follows: 

Part performance of an obligation either before or after a breach 
thereof when expressly accepted by the creditor in satisfaction 
or rendered in pursuance of an agreement for that purpose, 
though without any new consideration, shall be held to extin- 
guish the obligation. 

A substantially similar provision has been adopted in the laws of the 
four Western Provinces. 97 The section has generated only a sparse 
volume of litigation 98 and would appear to raise the following ques- 
tions. First, it remains unsettled whether the section covers all forms 
of obligation or is restricted to monetary debts. All the reported 
cases 99 have involved pecuniary obligations, and the use of the word 
"creditor" in line 2 of section 16 supports the restrictive reading of 
"obligation" in line 1. Secondly, there is a slender doubt whether 
"an agreement" to accept a lesser sum in satisfaction of the con- 
tractual debt must itself be supported by consideration. There is some 
authority 100 to support the doubt but the better view is that consider- 
ation is unnecessary. The third question involves a more serious 
doubt: 101 namely, whether the promisor is free to resile from his 
agreement before the part performance has been fully executed by 
the promisee. Finally, a literal reading of the section suggests that it 
cannot be invoked where a complete waiver, and not a partial dis- 
pensation from performance, is alleged. If this is correct, section 16 
is not as comprehensive in its operation as the doctrine of promissory 
estoppel. On the other hand, to the extent that an agreement to ac- 
cept part performance is binding per se and cannot be retracted, the 
statutory provision is more favourable to the promisee than this 
equitable doctrine. 

(4) Modifications made under seal. This exception requires no sep- 
arate discussion except to note its formalistic and impractical nature 
in the context of everyday business relationships. 

The effect of the above enumerated exceptions may be summarized 
as follows. The first three offer only partial relief from the normal re- 
quirement of consideration. Important types of modifications remain 
untouched, particularly those involving the so-called "duty" cases. Only 

9548 Vict., c. 13, (Ont.). 
96R.S.O. 1970, c. 272. 

97See, The Mercantile Law Amendment Act, R.S.M. 1970, c. M 120, s. 6; The 
Judicature Act, R.S.A. 1970, c. 193, s. 34(8); the Laws Declaratory Act, 
R.S.B.C. 1960, c. 213, s. 34; The Queen's Bench Act, R.S.S. 1965, c. 73, s. 45.7. 
98See the discussion in Waddams, The Law of Contracts (1977), p. 92. 
99See, Bank of Commerce v. Jenkins (1888), 16 O.R. 215 (C.P.D.); Mason v. 
Johnston (1893), 20 O.A.R. 412 (C.A.); Champlain Ready-Mixed Concrete v. 
Beaupre, [1971] 3 O.R. 568 (C.A.). 
lOOSee, Gregory, J., in Bell v. Quagliotti (1918), 25 B.C.R. 460 (S.C.). 
lOiSee, Waddams, footnote 98 supra, p. 92, n. 302. 



99 

the use of a seal avoids these difficulties, but the formalities of a sealed 
document, though now liberally interpreted, are still sufficiently signi- 
ficant to undermine its utility in the sales context. 

(ii) Proposals for Change 

Several of the recommendations in the Report of the English Law 
Revision Committee 102 were specifically designed to relieve against the 
rigidities of the consideration requirement with respect to contractual modi- 
fications. Recommendation 3 103 sought to abolish the rule in Pinnel's 
Case. Recommendation 4 104 addressed itself to the duty cases, while 
Recommendation 8 would have resulted in the adoption of a broad doc- 
trine of injurious reliance comparable to section 90 of the American 
Restatement on Contracts, and much more far-reaching in its impact 
than the existing doctrine of equitable estoppel. 

None of the Committee's recommendations has so far been imple- 
mented in the United Kingdom. It seems, therefore, appropriate to look 
elsewhere for suitable precedents. The Uniform Commercial Code pro- 
vides two models which deserve serious consideration. The first is repre- 
sented by section 1-107, which provides that: 

Any claim or right arising out of an alleged breach can be dis- 
charged in whole or in part without consideration by a written waiver 
or renunciation signed and delivered by the aggrieved party. 

The section has a relatively narrow compass. 105 It was designed as a 
general Code rule and not with a view to meeting the particular needs 
of contractual modifications in the sales area. This function was reserved 
to section 2-209, which reads: 

(1) An agreement modifying a contract within this Article needs 
no consideration to be binding. 

(2) A signed agreement which excludes modification or rescission 
except by a signed writing cannot be otherwise modified or rescind- 
ed, but except as between merchants such a requirement on a form 
supplied by the merchant must be separately signed by the other 
party. 

(3) The requirements of the statute of frauds section of this Article 



102 Supra, footnote 59. 

103 Recommendation 3 is as follows: 

That an agreement to accept a lesser sum in discharge of an enforceable 
obligation to pay a larger sum shall be deemed to have been made for 
valuable consideration, but if the new agreement is not performed then the 
original obligation shall revive. 

104 Recommendation 4 is as follows: 

That an agreement in which one party makes a promise in consideration 
of the other party doing or promising to do something which he is already 
bound to do by law or by a contract made either with the other party or 
with a third party, shall be deemed to have been made for valuable 
consideration. 

lOSCompare, NYLRC Study, footnote 52 supra, pp. (202) et seq. 



100 

(Section 2-201) must be satisfied if the contract as modified is within 
its provisions. 

(4) Although an attempt at modification or rescission does not 
satisfy the requirements of subsection (2) or (3) it can operate as a 
waiver. 

(5) A party who has made a waiver affecting an executory portion 
of the contract may retract the waiver by reasonable notification re- 
ceived by the other party that strict performance will be required of 
any term waived, unless the retraction would be unjust in view of a 
material change of position in reliance on the waiver. 

Comment 1 to the section explains that its purpose is "to protect and 
make effective all necessary and desirable modifications of sales contracts 
without regard to the technicalities which at present hamper such ad- 
justments". 

It will be observed that conceptually section 2-209 operates at two 
different levels. 106 Subsection (1) proceeds on an obligational theory and 
enforces the modified terms because the parties have agreed that it should 
be so. Subsections (4) and (5) are based, it would seem, on a qualified 
theory of injurious reliance or promissory estoppel and only give effect 
to a modified term, not supported by consideration, where it amounts to 
a waiver and it would be unjust to allow the promise to be retracted. 
Waiver is not defined in the Code, 107 but in its literal and traditional sense 
only encompasses the relinquishment of rights and not the assumption of 
new obligations. Presumably, therefore, a promisee could not invoke sub- 
section (4) to enforce payment of a higher sum than that called for in the 
original contract, even though he had altered his position in reliance on 
the promise. 108 In practice, promisees will no doubt prefer to rely on sub- 
section (1) unless they are precluded from doing so by the provisions 
of subsections (2) or (3). 

A traditional policy objection 109 to allowing a contracting party to 
enforce a promise given in exchange for performance of an existing 
obligation has been the fear that it would encourage the extortion of 
unjustified concessions; the requirement of consideration has been seen 
as a partial bulwark against such behaviour. The Code draftsmen antici- 
pated this danger and Comment 2 to section 2-209 makes it clear that 
the requirement of good faith will apply here, as elsewhere, and that 
"the extortion of a 'modification' without legitimate commercial reason 



io 6 For a detailed analysis of its provisions, see NYLRC Study, footnote 52 supra, 

pp. (640) et seq.; and compare, Duesenberg and King, footnote 23 supra, pp. 

4-34 et seq. 
i07Compare, Duesenberg and King, footnote 23 supra, p. 4-46.2, and NYLRC 

Study, footnote 52 supra, pp. (644) -(647). 
lOSBut see, contra, West Point-Pepperell, Inc. v. Bradshaw (1974), 377 F. Supp. 

154 (M.D. Ala.), criticized in Duesenberg and King, footnote 23 supra, 

(March, 1978 Cum. Supp.), at p. 71; and Thomas Knutson Shipbuilding Corp. 

v. George W. Rogers Constr. Corp. (1969), 6 U.C.C. Rep. Serv. 323 (N.Y. 

Sup. Ct.), summarized in Duesenberg and King, footnote 23 supra, (March, 

1978 Cum. Supp.), at pp. 71-72. 
1Q 9See, Treitel, footnote 46 supra, pp. 65-66. 



101 

is ineffective as a violation of the duty of good faith". As the cases 
show, 110 what is a "legitimate" commercial reason may not always be easy 
to answer. However, this uncertainty is endemic in the concept of good 
faith. Further, an Act that is designed to cover a vast variety of transac- 
tions cannot be expected to become particularistic without defeating its 
own purpose. What is important, in our view, is that the law should not 
frustrate reasonable and legitimate commercial practices. We therefore 
recommend the abolition of the need for consideration to support an 
agreement made in good faith modifying the terms of an existing contract, 
and our Draft Bill so provides. 111 

Two other issues need to be considered in conjunction with such a 
provision. The first is whether a court should be empowered to refuse to 
enforce a modification, not only on the ground of the promisee's bad 
faith, but also on the ground of its unconscionability. Arguably, in the 
context of a section 2-209 provision, the two tests overlap; but, to the ex- 
tent that there remains a difference, our answer would be in the affirma- 
tive. However, there is no need to say this expressly since, as is explained 
later, 112 we favour the adoption of a general unconscionability rule along 
the lines of UCC 2-302. This rule would apply to all contractual pro- 
visions, whether original or modified. 

The second issue is whether the modified term must be reduced to 
writing as a condition of its enforceability. Section 2-209 imposes such 
a requirement in two instances: (a) where the modified contract falls 
within the Statute of Frauds provisions of Article 2; 113 and, (b) where the 
contract contains a "private" Statute of Frauds provision such as is fre- 
quently found in standard form agreements. The second feature is es- 
sentially declaratory 114 and we have no objection to its adoption in the 
revised Act, although, in common with others, 115 we are sceptical about 
the value of requiring a separate signature where the clause appears in 
an agreement between a merchant and a non-merchant. 

The Commission is divided on the question, 116 but a majority of us 
are opposed to a general writing requirement as a condition of the en- 
forceability of contractual modifications. Later in this chapter, we recom- 
mend repeal of the existing Statute of Frauds provision in the Ontario 
Act. 117 In our view, it would be inconsistent to retain the requirement for 



iiOFor example, Ralston Purina Co. v. McNabb (1974), 381 F. Supp. 181 (D.C. 

Tenn.); Ruble Forest Products, Inc. v. Lancer Mobile Homes of Oregon, Inc. 

(1974), 524 P. 2d. 1204 (Ore. Sup. Ct.). Compare, North Ocean Shipping Co. 

Ltd. v. Hyundai Construction Co. Ltd., "The Atlantic Baron", [1978] 3 All 

E.R. 1170 (Q.B.). 
l"See, Draft Bill, s. 4.8(1). 
UVnfra, ch. 7, Part A. 
H3See, UCC 2-201. 
l 14 Apparently, pre-Code cases such as Green v. Doniger (1949), 90 N.E. 2d 56 

(N.Y.C.A.), held such clauses unenforceable. UCC 2-209(2) was designed to 

restore the parties' intention. 
115 For example, Duesenberg and King, footnote 23 supra, p. 4-34. 
H6Two of the Commissioners, the Honourable J. C. McRuer and Mr. W. Gibson 

Gray, are of the view that a written agreement should be capable of modifi- 
cation only in writing. 
117 See infra, this chapter, section 6. 



102 

some purposes and not for others. We have found no evidence that simul- 
ated oral variations constitute a greater threat than original agreements 
concluded orally; the traditional concerns have been with respect to modi- 
fications procured by unfair means, and these we have attempted to meet. 

To the extent that a private "Statute of Frauds" provision, or perhaps 
a writing requirement imposed under another Act, precludes per se 
enforcement of the modified agreement, the doctrines of waiver and equit- 
able estoppel will retain their relevance. Subject to what we say hereafter, 
this should be made clear in the revised Act. As we have previously noted, 
UCC 2-209(4) and (5) only refer to a "waiver". We have added a spe- 
cific reference to equitable estoppel to the corresponding provisions in the 
Draft Bill to make it clear that they apply to waiver of substantive obliga- 
tions, as well as to compliance with procedural requirements. 118 

We conclude with a brief note on section 16 of The Mercantile Law 
Amendment Act. Where a modified agreement is enforceable under our 
earlier recommendation, as well as under this section, the enforcing party 
may have a choice of avenues. However, in cases not involving a contract 
of sale, he will not have a similar choice. This alone is sufficient reason 
for its retention. As we have indicated previously, the section requires 
clarification in several respects. We are, however, content to leave this 
task to the Law of Contract Amendment Project. 

(c) SHOULD THE EFFECT OF SEALS BE ABOLISHED? 119 

UCC 2-203 provides that: 

The affixing of a seal to a writing evidencing a contract for sale or 
an offer to buy or sell goods does not constitute the writing a sealed 
instrument and the law with respect to sealed instruments does not 
apply to such a contract or offer. 

We do not recommend adoption of such a provision in the revised Ontario 
Act. The purpose of the section, as its language and Comment 1 make 
clear, is to deprive a seal of any special effect that its use would otherwise 
have at common law on a contract of sale or an offer to buy or sell. 
However, the result is not as radical as may appear at first sight since, 
as has been seen, Article 2 goes a long way towards remedying the defects 
in the prior law of consideration and, as a result, few advantages would 
remain in the use of a seal in sale transactions, even assuming business- 
men could be expected to be aware of them. However, the abolition of the 
effect of a writing under seal would still make a difference; for example, 
with respect to the binding character of a firm offer for an unspecified 
period made without consideration, where the offeree purports to accept 
the offer after a period of three months has elapsed. 120 The adoption of a 
section similar to UCC 2-203 would also raise important questions with 
respect to the role and effectiveness of sealed writings in other branches 
of the law. We think it better, therefore, that any change in the law of 



H8See, Draft Bill, s. 4.8(3) and (4). 

i^See, Waddams, "Sealed Contracts in the Sale of Goods", Research Paper No. 

II.9A. 
120 See, supra, this ch., at p.94. 



103 

sealed writings should await the outcome of a comprehensive review of the 
doctrine of consideration and the enforceability of gratuitous promises. 

5. Mistake 

Another important area of general contract law that gives rise to 
recurring difficulties is that of mistake. The doctrine of mistake was the 
subject of a separate research paper prepared for the Commission. 121 
As noted in the paper, 122 the operative effect of mistake on the formation 
and enforceability of a contract has generated intense discussion among 
legal scholars. There is, however, little agreement concerning important 
issues, including the following: namely, the proper role of mistake in 
contract law; the present state of the law; the nature of the problems; or, 
the manner in which they should be resolved. This lack of agreement 
might suggest a fertile field for law reform. However, most of the basic 
issues are neither peculiar to sales law, nor more important in their 
practical impact on the law of sales than on other branches of contract 
law. We agree with the conclusion reached in the research paper that a 
comprehensive review of the general principles of the law of mistake 
can only be undertaken in the context of their relationship to other 
questions of contract law. 

We turn now, however, to a consideration of two facets of the law 
that are expressly or inferentially regulated in the existing Act. Thereafter, 
we will indicate our reaction to the more generalized recommendations 
contained in the research paper. 

(a) RES EXTINCTA 

Sections 7 and 8 of The Sale of Goods Act provide as follows: 

7. Where there is a contract for the sale of specific goods and 
the goods without the knowledge of the seller have perished at the 
time the contract is made, the contract is void. 

8. Where there is an agreement to sell specific goods and sub- 
sequently the goods without any fault of the seller or buyer perish 
before the risk passes to the buyer, the agreement is thereby avoided. 

It will be convenient to postpone discussion of section 8, which deals 
with casualty to goods after their identification to the contract, to the 
chapter of this Report dealing with frustration of the contract of sale. 123 
Some discussion of section 7 is, however, in our view, useful at this stage. 

Section 7 is based on the effect that was for a long time ascribed 
to the decision of the House of Lords in Couturier v. Hastie. 124 Its 
statutory formulation raises several important questions of construction 
and a basic issue of principle. The constructional issues will be mentioned 
briefly. 125 Section 7 only applies to goods that have perished. It does not 

121 John D. McCamus, "Mistake in Contracts for the Sale of Goods", Research 

Paper No. II.8. 
U2Ibid.,p. 1. 
123 See, infra, ch. 15. 

124(1856), 5 H.L. Cas. 673, 10 E.R. 1065. 
125 See, McCamus, footnote 121 supra, pp. 32-36. 



104 

apply expressly to a case where the goods have never existed, have 
disappeared, or have been disposed of prior to the contract of sale. Nor 
is the requirement of perishment apt to describe goods that have deterior- 
ated seriously in quality, but still retain a physical existence. There is a 
further point. The words "specific goods" are defined in section l(l)(m) 
to mean "goods identified and agreed upon at the time the contract of sale 
is made". Accordingly, it is not clear to what extent section 7 applies to 
partly perished goods or to goods to be derived from an agreed source 
of supply that has failed. Finally, the section is markedly silent on the 
effect of the seller's negligence in failing to know the true position before 
entering into the contract of sale. 

The broad issue of principle raised by section 7 may be stated in 
this way: it is difficult 126 to reconcile the section with the general con- 
ceptual framework of the Act and, in particular, with later provisions 127 
that impose upon the seller implied obligations with respect to his title 
and the merchantability and fitness of the goods sold by him. It seems 
clear, in the absence of special circumstances or an effective disclaimer 
clause, that a mistaken assumption by the parties with respect to the 
implied warranties will not excuse the seller. Except in historical terms, 
it is not easy to explain why a different rule should be applied when the 
seller's mistake involves the existence of the goods, rather than his title 
to, or the proper attributes of, the goods. Couturier v. Has tie was dis- 
tinguished by the High Court of Australia in its well known decision 
in McRae v. Commonwealth Disposals Commission. 129 Further, several 
learned authors have suggested 129 that section 7 does not state an inflexible 
rule, but merely gives rise to a presumption, in the cases to which it 
applies, that the seller is not contracting that the goods exist. 

The Code's counterpart to sections 7 and 8 is section 2-613. This 
section provides: 

Where the contract requires for its performance goods identified when 
the contract is made, and the goods suffer casualty without fault 
of either party before the risk of loss passes to the buyer, or in a 
proper case under a 'no arrival, no sale' term (Section 2-324) then 

(a) if the loss is total the contract is avoided; and 

(b) if the loss is partial or the goods have so deteriorated as no 
longer to conform to the contract the buyer may nevertheless 
demand inspection and at his option either treat the contract as 
avoided or accept the goods with due allowance from the con- 
tract price for the deterioration or the deficiency in quantity but 
without further right against the seller. 

It will be noted that the section collapses the distinction between the effect 
of frustrating events subsequent to the formation of the contract and a 



l26Compare, Atiyah, The Sale of Goods (5th ed., 1975), p. 40. 
1 27 The Sale of Goods Act, ss. 13-15. 
128(1951), 84 C.L.R. 377. 

12 9For example, Atiyah, footnote 126 supra, p. 43; Benjamin's Sale of Goods 
(1974), para. 123. 



105 

mistaken assumption with respect to the existence of the goods at the 
time of contracting, and treats them as two sides of the same coin. It will 
be seen, too, that the section resolves some, but not all, of the construc- 
tional questions presented by section 7. The issue of principle, however, 
only surfaces in Comment 2 which, after referring to the case in which 
the risk has passed to the buyer before casualty, continues as follows: 

Beyond this, the essential question in determining whether the rules 
of this section are to be applied is whether the seller has or has not 
undertaken the responsibility for the continued existence of the 
goods in proper condition through the time of agreed or expected 
delivery. 

It is not clear whether this qualification is only meant to apply to frustrat- 
ing events occurring subsequent to the time of sale. Assuming it is not, 
it may be objected that, if section 2-613 was only intended to operate as 
a presumptive rule, this should have been stated clearly and not buried 
in a Comment. Apart from this feature, it appears from another part of 
the official annotation that the Code provisions were not intended to 
change the basic policy of sections 7 and 8 of the Uniform Sales Act, 
which in turn were based on sections 6 and 7 of the U.K. Act, the pre- 
cursors of sections 7 and 8 of the Ontario Act. 

What then should be the policy of the revised Ontario Act? There 
are several possibilities. One is to retain the essential structure of section 
7 of the existing Act, subject to correction of the technical defects that 
have been mentioned. A second possibility is to reject the conceptual basis 
of the section and to provide that the seller warrants the existence of the 
goods, unless the circumstances indicate the contrary. The third possibility 
is to adopt a compromise position, which would involve retention of the 
principle of the section, but which would make it clear that the rule can be 
rebutted by contrary indications and that, in any event, the seller will not 
be excused if he has behaved negligently. For reasons of continuity we 
favour the third course. Accordingly, the Commission recommends the 
adoption in Ontario, in place of section 7 of the existing Act, of a pro- 
vision, similar to UCC 2-613, with respect to the effect of the parties' 
mistaken assumption as to the existence of the goods. The new sec- 
tion should, however, make it clear that its provisions can be rebutted 
by evidence of a contrary intention by the parties, and that the seller 
will not be excused from non-performance if he has behaved negligently. 
Our Draft Bill so provides. 130 We also see substantial merit in merging 
sections 7 and 8 of the existing Act, as has been done in UCC 2-613. In 
addition, there are a number of technical changes that we should like to 
see in our recommended version of UCC 2-613, and we deal with these 
matters in a later chapter 131 devoted to the subject of frustration. 



i30See, Draft Bill, s. 8.13. 
131/az//yz, ch. 15. 



106 



(b) MISTAKES OF IDENTITY 



It is well settled by a long line of decisions 132 that a mistake by the 
seller with respect to the identity of the buyer, induced by the latter's 
fraud, will preclude the formation of a binding contract and entitle the 
seller to recover the goods in the hands of a third party. If, however, his 
mistake only goes to the buyer's attributes, the contract is voidable; in 
this event, a third party will obtain good title if the agreement has not 
been avoided before the goods have been acquired by him in good faith 
and for value. The difficulty is to determine what amounts to a mistake 
of identity and what is to be treated as a mistake about attributes. The 
cases are legion and often difficult to reconcile with one another. The 
author of the research paper prepared for the Commission on this topic 133 
proposed to resolve the difficulty by abolishing the distinction between 
void and voidable titles and treating all mistakes involving the other 
contracting party as making the contract only voidable. A similar recom- 
mendation is contained in the Report of the Law Reform Committee on 
the Transfer of Title to Chattels. 134 This proposal is also in line with the 
rule adopted in UCC 2-403(1) (a). These developments will be discussed 
further in the chapter in this Report 135 on the operation of the nemo dat 
rule in sales law. The Commission has also considered a proposal 136 
that would give the courts broad discretionary powers to allocate the loss 
resulting from the buyer's fraud between the seller and the third party. 
This suggestion, too, will be examined in the later chapter. For the 
moment it will suffice to say that we support the first proposal but have 
some reservations about the second. 

(c) WIDER PROPOSALS FOR REFORM 

In addition to these relatively modest changes the research paper 
mentioned above contained the following much more significant recom- 
mendations 137 for the clarification and recasting of existing mistake rules: 

(1) all operative mistakes should be treated as voidable or equit- 
able in character and flexible remedies permitting recovery of 
restitutionary and reliance losses and their apportionment should 
be adopted; 

(2) the distinction between mistakes of fact and mistakes of law 
should be eliminated; 

(3) the doctrine of mistake based upon erroneous common assump- 
tions should be supported. The rules should be codified and an 



i32See, for example, Hardman v. Booth (1863), 158 E.R. 1107 (Exch.); Cundy 
v. Lindsay (1878), 3 App. Cas. 459 (H.L.); Wilson v. Windsor Foundry Co. 
(1901), 31 S.C.R. 381; Lake v. Simmons, [1927] A.C. 487 (H.L.); Cuff- 
Waldron Mfg. Co. v. Heald, [1930] 3 D.L.R. 901 (Sask. C.A.). Compare, 
Lewis v. Averay, [1972] 1 Q.B. 198 (C.A.). 

133 McCamus, footnote 121 supra, p. 79, Recommendation 1. 

i34Law Reform Committee, Twelfth Report (Transfer of Title to Chattels) (1966), 
(Cmnd. 2958), para. 15. 

135/,!/™, ch. 12. 

136 McCamus, footnote 121 supra, pp. 79-80, Recommendation 2. 

Mlbid., pp. 61, 79. 



107 

appropriate framework of criteria, based upon a previously 
devised formula 138 should be supported; and, 

(4) the distinction between common and unilateral mistaken as- 
sumptions should be abolished. 

The Commission has not studied these proposals in detail, and expresses 
no view with respect to their merits. With the exception of cases of res 
extincta and mistaken identity, mistake problems have no preponderant 
sales law dimension. We therefore recommend that the proposals be de- 
ferred for further study as part of the Law of Contract Amendment 
Project. 

6. Formalities of Formation (Statute of Frauds 
Requirements) 139 

(a) INTRODUCTION 

One of the most familiar landmarks in The Sale of Goods Act is the 
Statute of Frauds provision in section 5. This section reads as follows: 

5. — (1) A contract for the sale of goods of the value of $40 
or more is not enforceable by action unless the buyer accepts part of 
the goods so sold and actually receives them, or gives something 
in earnest to bind the contract or in part payment, or unless some 
note or memorandum in writing of the contract is made and signed 
by the party to be charged or his agent in that behalf. 

(2) This section applies to every such contract notwithstanding 
that the goods may be intended to be delivered at some future time, 
or may not at the time of the contract be actually made, procured, 
or provided, or fit or ready for delivery, or some act may be requisite 
for the making or completing thereof, or rendering them fit for 
delivery. 

(3) There is an acceptance of goods within the meaning of this 
section when the buyer does any act in relation to the goods that 
recognizes a pre-existing contract of sale, whether there is an ac- 
ceptance in performance of the contract or not. 

As is well-known, section 5 has an ancient lineage and reproduces, with 
minor modifications, section 17 of the Statute of Frauds, 1677. 140 The 
passage of time has not, however, improved its image. The Commission 
has reached the conclusion that section 5 has outlived whatever usefulness 
it may have had, and that it should be omitted in its entirety from the 
revised Act. In taking this step, Ontario would be following the respectable 
precedents set by the U.K. Law Reform (Enforcement of Contracts) Act 
1954, 141 its New Zealand counterpart, 142 and the amendment adopted by 

138 See, Rabin, "A Proposed Black-Letter Rule Concerning Mistaken Assumptions 

in Bargain Transactions" (1967), 45 Tex. L. Rev. 1273. 
139 See, also, Crawford, "Formalities of Formation (Statute of Frauds)", Research 

Paper No. II.4. 
14029 Car. 2, c. 3 (part), as amended by 9 Geo. 4, c. 14, s. 7. 
1412 & 3 Eliz. 2, c. 34, s. 2. 
142 Contracts Enforcement Act, 1956, s. 4. 



108 

British Columbia in 1958. 143 These in turn merely implement the recom- 
mendations of several committees of inquiry in various parts of the 
Commonwealth. 144 We note, too, that neither the Hague Uniform Laws 
nor the UNCITRAL draft Convention contains a Statute of Frauds 
requirement. 

The recommendations to which we have referred climax the criticisms 
of a generation of scholars. In one of the earliest critiques of section 17 
of the Statute of Frauds, 145 Mr. Justice Stephen and Sir Frederick Pollock 
concluded as follows : 

... in the vast majority of cases its operation is simply to enable a 
man to break a promise with impunity, because he did not write it 
down with sufficient formality. 

The Report of the English Law Reform Committee of 1953, which led to 
the adoption of the 1954 Act, echoed the same sentiments and made 
the following observations concerning the Statute of Frauds provisions: 146 

[They have] . . . outlived the conditions which generated and, in 
some degree, justified them; . . . they operate in an illogical and 
often one-sided and haphazard fashion . . . and ... on the whole . . . 
promote rather than restrain dishonesty. 

In our opinion these criticisms are just as applicable to Ontario as they 
are to the United Kingdom. 

(b) SOME EMPIRICAL DATA 

The arguments in favour of the repeal of section 5 are already so 
fully documented that no good purpose would be served by repeating 
them here. It may, however, be useful to refer to one of the most com- 
monly made points: that the section fails to reflect business practices and 
that it is futile to force contracting parties to adopt procedures that do 
not correspond to their legitimate needs and expectations. The gulf be- 
tween law and practice is brought out clearly in the results of the C.M.A. 
Questionnaire. 147 In the Questionnaire a substantial group of questions was 
designed to elicit information with respect to the frequency and importance 
of writings. In their capacity as purchasers of supplies, 91.3% of the 
respondents claimed that they themselves customarily provide evidence 
of the contract. On the other hand, only 25.6% of the respondents re- 
ported that they "always" receive an unsolicited confirmation from their 
suppliers. In the result, 148 although probably bound themselves, approxi- 



143S.B.C. 1958, c. 52, s. 17. 

l^Law Reform Committee, First Report (Statute of Frauds and Section 4 of the 
Sale of Goods Act, 1893) (1953), (Cmd. 8809). See also Law Reform Com- 
mission, New South Wales, Working Paper on The Sale of Goods (1975), 
Part 4. 

i45Stephen and Pollock, "Section Seventeen of the Statute of Frauds" (1885), 1 
L.Q. Rev. 1, 4. 

i 46 Law Reform Committee, footnote 144 supra, para. 2. 

147 See, Crawford, footnote 139 supra, pp. 20 et seq. 

IWbid., p. 21. 



109 

mately 60% of the respondents estimate that they would only sometimes, 
or rarely, or never, be in a position to enforce the contract by a writing 
delivered by the other party. 

The relative unimportance attached by manufacturers to receiving 
written confirmation of orders, or written confirmation of oral variations 
of earlier orders, is illustrated in other respects. A "staggering" 79.9% 
admit that even where they have not received a writing they will begin 
production or even shipment without a writing. 149 Our research also in- 
dicates that fully 84.1% of the respondents admitted that they would 
"always" (22.3%), "usually" (35.6%) or at least "sometimes" (26.2%) 
start production or shipment on an oral agreement to vary the terms of 
the written order. 150 There was little evidence that the respondents were 
sensitive to (or perhaps able to react sensitively to) the $40 exception 
contained in section 5; or, for that matter, that they might be sensitive 
to any higher contract values that might be substituted. It may, therefore, 
be concluded that manufacturers do not modify their patterns of reliance 
upon oral contracts according to whether or not they are legally en- 
forceable. 

Businessmen's different perceptions are also reflected in their reaction 
to cancelled contracts. 151 Of the respondents, 70.1% replied that they 
would "never" sue if a purchaser cancelled an order, whether written or 
oral, even after they had begun production. On the other hand, and 
perhaps anomalously, the respondents still appear to attach considerable 
importance to the existence of writing as a condition of the enforcement 
of contracts. The great majority (95.2% ) thought that, where both 
parties had signed documents relating to an order, the transaction ought 
to be legally enforceable; 68.2% thought it was sufficient that the de- 
fendant had signed an order, and 60.8% were prepared to extend that 
protection even to an oral order "where the suing party has performed". 
Only 13.9% apparently supported enforcement where "neither party has 
signed documents relating to an order and the suing party has not per- 
formed". 

The disparity between what the respondents actually do and the 
norms they claim to support is striking, and not easily explained. In part 
it seems to reflect many a layman's view about the sanctity of a written 
commitment and the fragility of the verbal promise. A more important 
reason probably lies in the fact that most businessmen are so little de- 
pendent on legal norms for the successful operation of their daily trans- 
actions that they are willing to subscribe to a Statute of Frauds require- 
ment without apparently appreciating the serious inequities it is capable 
of causing. Given these considerations, it would surely be unwise to use 
this particular set of answers as a reliable guide to the future disposition 
of section 5. 



149/foV/., p . 22. 

KOIbid., p. 24. 

^^Ibid., pp. 24-25. In the present paragraph we have adjusted some of the per- 
centages that are cited in Mr. Crawford's paper from absolute to relative 
or adjusted frequencies. 



110 

(c) ABOLITION VERSUS MODIFICATION: UCC 2-201 

Section 5 of the Uniform Sales Act reproduced section 17 of the 
Statute of Frauds, 1677 with two important modifications: 152 namely, by 
raising the monetary figure of bargains excepted from the reach of the 
section to $500, and by excluding altogether goods manufactured specially 
to the buyer's order. Section 2-201 of the Uniform Commercial Code 
attempts to meet the traditional criticisms of the section still further by 
incorporating two additional important changes. First, the need for a 
memorandum in writing incorporating all the terms of the bargain is 
abolished, and the plaintiff need now only show "some writing sufficient 
to indicate that a contract for sale has been made". 153 Secondly, between 
merchants the writing requirement is satisfied if, within a reasonable time, 
a writing in confirmation of the contract and sufficient against the sender 
is received, and if the recipient has reason to know its contents and gives 
no written notice of objection within ten days of receipt. 154 

If there were some intrinsic merit to retaining a Statute of Frauds 
requirement, these modifications would have much to commend them. 
But, in our view, there is no such merit; certainly, we know of no argu- 
ments in favour of retention that can match those in favour of abolition. 
No adverse consequences have been noticed during the twenty-five years 
that have elapsed since the repeal of the section in the United Kingdom 
and other jurisdictions; 155 and there does not appear to be any foundation 
for the fear that parties may be tempted to produce perjured evidence. 
We note, too, the dearth of postAVorld War II sales litigation involving 
section 5, which suggests that lawyers have lost the enthusiasm that they 
once entertained for this section as a defensive shield. We believe that the 
courts would be quite capable of dealing with the exceptional case of 
fraud, if it arose, and that the advantages to the legal system of repealing 
the section will greatly exceed any resultant disadvantages. Accordingly, 
the Commission recommends that the revised Act should contain no pro- 
vision equivalent to section 5. It should, however, be clearly understood 
that our recommendation is confined to contracts for the sale of goods, 
and that we express no opinion with respect to the desirability of retaining 
Statute of Frauds requirements in the case of other types of contract. 

7. The Parol Evidence Rule 156 

(a) THE PROBLEM 

A question considerably more difficult to answer than whether section 
5 should be abolished is what changes, if any, should be made to the 



mi bid., pp. 8-10. 

153UCC 2-201(1). 

154UCC 2-201(2). 

155 See, Crawford, footnote 139 supra, p. 15. 

15 6In considering our position on this topic, we have benefited from, inter alia, a 
memorandum on the parol evidence rule prepared by Mr. (now Professor) 
Robert Forbes under the guidance of Mr. Bradley Crawford. We are grateful 
to these gentlemen for their assistance, but wish to make it clear that neither 
of them is responsible for the views that follow. 



Ill 

parol evidence rule. As generally stated, 157 the rule provides that, where 
the parties have intended a writing to be the final expression of their 
agreement, extrinsic evidence is not admissible to add to, vary or con- 
tradict the written terms of the agreement. 

The purpose of the rule, it is said, 158 is to foster certainty and 
predictability in legal transactions, to reduce the danger of perjured evi- 
dence and fallible memories, and to discourage protracted trials on 
evidentiary issues. These are certainly commendable goals, and if they 
could be accomplished simply and efficiently in practice without causing 
greater harm than the rule was designed to avoid, there would be little 
justification for tampering with the rule. In fact, there is a marked diver- 
gence between practice and theory, 159 and the defects in the rule have been 
the subject of mounting criticism. 160 In a recent Working Paper 161 the 
English Law Commission deemed the defects to be sufficiently serious to 
warrant abolition of the rule. The question that we have considered is 
whether this recommendation should be followed in the revised Sale of 
Goods Act. 

The following are some of the major objections to the rule: 

(i) The rule is seriously ambiguous. The rule purports to state that, 
// the parties have intended a writing to be the final expression of their 
agreement, extrinsic evidence will not be admitted to alter its terms. 
Logically, therefore, in every case the court should embark upon an 
investigation of all the surrounding circumstances to determine the parties' 
intention, a process that would necessarily involve the admissibility of 
extrinsic evidence. Corbin 162 has adopted this position, and so have an 
increasing number of American courts. 163 The parol evidence rule in 
Article 2, section 2-202, appears to favour the same approach. 164 The 

157 For a general discussion of the rule and the exceptions to it, see: Sopinka & 
Lederman, The Law of Evidence in Civil Cases (1974), pp. 269 et seq.', 
Treitel, The Law of Contract (4th ed., 1975), pp. 121 et seq.; Fridman, The 
Law of Contract in Canada (1976), pp. 245 et seq.', Waddams, The Law of 
Contracts (1977), pp. 191 et seq.; Cross, Evidence (3rd ed., 1967), pp. 508 
et seq. 

i58Compare, Ellis v. Abell (1884), 10 O.A.R. 226, especially per Burton, J.A., at 
pp. 246 et seq. 

l59\Vriting in 1963, Corbin commented that "the most active field of contract 
litigation at present is that of interpretation and the 'Parol Evidence Rule'. 
Probably one-half of the reported cases are concerned primarily therewith": 
Corbin on Contracts (1963), Vol. 1, p. iv. 

i60See, for example, Sweet, "Contract Making and Parol Evidence: Diagnosis and 
Treatment of a Sick Rule" (1968), 53 Corn. L. Rev. 1036; Comment, "The 
Parol Evidence Rule: Is it Necessary?" (1969), 44 N.Y.U.L. Rev. 972; Law 
Commission, Working Paper No. 70, Law of Contract, The Parol Evidence 
Rule (1976); Law Reform Commission, New South Wales, Working Paper on 
The Sale of Goods (1975), Part 5. 

i6iLaw Com. W.P. No. 70, footnote 160 supra. 

* 62 Corbin on Contracts, Vol. 3, s. 573, at p. 360. See, also, Restatement of the 
Law of Contracts, s. 228, and Restatement of the Law, Contracts 2d, Tent. 
Draft, s. 235. 

i63See, for example, Masterson v. Sine (1968), 436 P. 2d 561 (Cal. Sup. Ct.); 
Royal Industries v. St. Regis Paper Co. (1969), 420 F. 2d 449 (9th Cir.). 

i64See, UCC 2-202, Comment 3; White & Summers, footnote 17 supra, pp. 68-70. 
The Code provisions are discussed hereafter. 



112 

traditional attitude of the Anglo-Canadian courts, on the other hand, 165 
has been to say that if a writing "looks" like an integrated expression of 
the parties' agreement (sometimes referred to as the "appearance test"), 
and a fortiori if the writing contains an integration clause, 166 it will be 
treated so in fact. It is this feature of the rule that lies at the root of so 
many of the difficulties. 167 

(ii) The rule is more honoured in the breach than in its observance. 
Over the years many exceptions 168 have developed to the rule. It is not 
difficult for a sympathetic judge to fasten on one or other of these ex- 
ceptions for the purpose of relaxing the strict application of the rule. Some 
of the exceptions are very difficult to reconcile with the rule. Of particular 
importance is the admissibility of extrinsic evidence to prove a collateral 
contract. 169 It was at one time thought that such evidence was only ad- 
missible to supplement the terms of the writing, but recent English and 
Canadian cases 170 show that the exception is not so confined. These and 
other post-war decisions indicate a growing dissatisfaction with the rule, 
and reject it in all but name where it is seen to work hardship. 

(iii) The rule does not recognize the realities of modern standard 
form agreements. 111 The rule had its origins in an era when writing was 
a much more deliberative act than it is at present, and when the rules of 
evidence generally were much stricter. Today, the typical sales contract, 
when it is signed by both parties, is of a standard form. With the exception 
of the core terms, such as price, quantity and description, it is more 
likely to be an expression of the seller's need for uniformity than the 
result of genuine bargaining between buyer and seller. This truism has 
been increasingly recognized by both courts and legislatures through 
the development of the doctrine of unconscionability and of other means 
to curb one-sided terms. The logical corollary of this trend should have 
been an equally cautious approach to the parol evidence rule: it is no 
more realistic to assume that the buyer intended the writing to be the 
final and exclusive expression of the parties' agreement than it is to 
assume that he freely agreed to all the printed terms. This was the rationale 
underlying our recommendation in the Report on Consumer Warranties 



i65See, Wedderburn, "Collateral Contracts", [1959] Camb. LJ. 58, 60-61, cited 
in Law Com. W.P. No. 70, footnote 160 supra, para. 29. 

166 That is, a clause stating that the writing contains the whole agreement between 
the parties. 

!67Compare, Law Com. W.P. No. 70, footnote 160 supra, paras. 26 et seq. 

168 The number of exceptions varies among writers. The Law Commission's 
Working Paper, footnote 160 supra, paras. 10 et seq., lists eight: namely, vitiat- 
ing factors; condition precedent; rectification; specific performance and rescis- 
sion; damages for misrepresentation; non-exclusiveness of writing; collateral 
contract; and, custom and implied terms. 

l69See, Law Com. W.P. No. 70, footnote 160 supra, pp. 10-12; Wedderburn, 
footnote 165 supra. 

VOCity of Westminster Properties (1934) Ltd. v. Mudd, [1959] Ch. 129; Men- 
delssohn v. Normand, [1970] 1 Q.B. 177; Evans & Son Ltd. v. Andrea Mer- 
zario Ltd., [1976] 2 All E.R. 930 (C.A.); Canadian Acceptance Corp. v. Mid- 
Town Motors Ltd. (1970), 72 W.W.R. 365 (Sask. Dist. Ct.). Compare, 
Hawrish v. Bank of Montreal, [1969] S.C.R. 515. 

171 Compare, Law Reform Commission, New South Wales, footnote 160 supra, 
para. 5.9. 



113 

and Guarantees 172 that the rule should be abolished in consumer sales. 
Presumably, it also provided the motivation for the abolition of the rule in 
The Business Practices Act. 113 We are not persuaded that, in this context, 
the distinction between consumer and non-consumer transactions is mean- 
ingful. It is not so obvious to us that a small businessman, artisan, or even 
professional person, signing a contract of adhesion 174 should always be 
deemed to have a better understanding of the rules of evidence and con- 
tract than a consumer; indeed, the empirical evidence is very much to 
the contrary. 

(iv) The rule draws an artificial distinction between contractual and 
non-contractual representations. In the absence of an integration clause, 
the rule does not apply to a non-contractual representation inducing the 
formation of the contract. By definition, such a representation is not a 
term of the contract, and admitting it in evidence will not vary or con- 
tradict the contract. A later recommendation in this Report 175 favours 
the adoption of a reliance test to determine whether or not a representa- 
tion amounts to a warranty: that is, whether or not it is to be treated as 
a term of the contract. The acceptance of this recommendation could 
lead to representations being treated more readily as terms of the contract 
than they are at present. The retention of the parol evidence rule in its 
existing form could substantially undermine this desirable goal, since it 
would frequently preclude the representee from giving evidence of the 
representation, where the representation is not reproduced in the written 
form of the agreement. 

(v) The rule runs against the modern trend in the law of evidence. 116 
The current trend is to relax the rules of evidence and to admit relevant 
and probative evidence, leaving its cogency and credibility to the trier of 
fact. Jury trials in Canada in commercial cases are very unusual. We are 
not, therefore, confronted with the dilemma of the ability of juries to 
weigh accurately the credibility of parol evidence. This dilemma appears 
to be an important reason for the continued support for the retention of 
the parol evidence rule in the United States, where juries are much more 
common. 

(vi) The rule does not, in fact, lead to more efficient or speedier 
trials. Even the most ardent advocates of the rule would not deny the 
need for exceptions to the rule; nor would they deny the need for some 
sort of test to determine whether or not the writing is an integrated 
expression of the parties' agreement. These issues cannot, however, be 
decided without admitting at least some extrinsic evidence, even though, 
ultimately, the evidence or its effect may be rejected because it conflicts 
with the rule. The saving, therefore, in judicial time is at best only 
marginal, even assuming — which we do not — that efficiency considera- 



172 Ontario Law Reform Commission, Report on Consumer Warranties and 

Guarantees in the Sale of Goods (1972), p. 30. 
173S.O. 1974, c. 131, s. 4(7). 
174 A contract of adhesion is a standard form contract whose pre-printed terms 

are non-negotiable. 
i75See, infra, ch. 6, pp. 139, 142. 
176 Compare, Law Com. W.P. No. 70, footnote 160 supra, paras. 35-36. 



114 

tions of this nature should play a critical role in determining the future of 
the rule. 

Considerations such as the above led the English Law Commission 
to conclude 177 that the "Parol evidence rule no longer serves any useful 
purpose. It is a technical rule of uncertain ambit which, at best, adds to 
the complications of litigation without affecting the outcome and, at worst, 
prevents the courts from getting at the truth." We agree with this verdict, 
and now proceed to consider a number of possible solutions to the pre- 
sent impasse. 

(b) ALTERNATIVE SOLUTIONS 

We have already indicated the English Law Commission's proposal to 
abolish the parol evidence rule. The New South Wales Law Reform 
Commission in its Working Paper on the Sale of Goods has made a re- 
commendation which, although it appears to be similar in effect, is ex- 
pressed differently. The Commission proposed that the rule be modified 
"so that if a contract for the sale of goods is in writing the presumption 
is that it is not intended to be the conclusive and exclusive record of the 
transaction and that the onus of proof that it is so intended should be 
on the party alleging such to be the case". 178 The Commission also felt 
that the use of standard clauses to establish such an intention should be 
frowned upon, and that they should be given little or no weight. 179 We 
construe these recommendations as involving the abolition of the existing 
rule, coupled with a shifting of the burden of proof to the party alleging 
the integrated nature of the writing. It is not, however, clear from the 
Working Paper how the burden is to be discharged in practice, or what 
would be sufficient to discharge the burden. 

Another alternative would be to confer upon the court the power 
not to apply the rule in a given case where, in the court's opinion, it would 
be unreasonable to do so. Although initially attracted to this solution as a 
compromise between total abolition and maintenance of the status quo, 
we are of the view that it suffers from two important weaknesses. The 
first is that it does not address itself directly to the artificial nature of the 
rule: it seeks to mitigate, rather than eliminate, the rule. The second is 
that it would add one more element of uncertainty in an area already 
abounding in uncertainty. The Commission therefore rejects this approach. 

Another possible compromise is found in UCC 2-202. This section 
reads as follows: 180 

Terms with respect to which the confirmatory memoranda of the 
parties agree or which are otherwise set forth in a writing intended 
by the parties as a final expression of their agreement with respect 
to such terms as are included therein may not be contradicted by 



mibid., para. 43. 

178 Law Reform Commission, New South Wales, Working Paper on The Sale of 

Goods (1975), p. 60. 
Wlbid. 
180 Compare, Restatement of the Law, Contracts 2d, Tent. Draft, ss. 239-242. 



115 

evidence of any prior agreement or of a contemporaneous oral agree- 
ment but may be explained or supplemented 

(a) by course of dealing or usage of trade (Section 1-205) or by 
course of performance (Section 2-208) ; and 

(b) by evidence of consistent additional terms unless the court finds 
the writing to have been intended also as a complete and ex- 
clusive statement of the terms of the agreement. 

This section goes a substantial distance towards removing the objections 
to the parol evidence rule; but, in our opinion, it does not go far enough. 
The strengths of the section are as follows: (a) it rejects any assumption 
that, because some of the terms of an agreement have been reduced to 
writing, the parties intended it to be the final expression of all the terms; 
and, (b) its inferential rejection of the "four corners" or "appearance" 
test in determining the finality and exclusiveness of a writing. The weak- 
nesses of the section are two-fold. First, it disallows the admissibility of 
extrinsic evidence that contradicts an express written term, whether or not 
the writing was intended to be an integrated document. Secondly, it fails 
to indicate how much weight is to be given to an integration or merger 
clause. As might be expected, the first weakness has proved to be par- 
ticularly troublesome in practice, and some courts 181 have been forced 
to resort to some rather artificial reasoning to justify the admissibility of 
extrinsic evidence that conflicts with the parties' writing. 

(c) CONCLUSION 

Having reviewed the various alternatives, a majority of the Commis- 
sion is impressed by the simplicity and flexibility of the English Law 
Commission's proposal, and adopts it as its own. Accordingly, we re- 
commend 182 that the parol evidence rule should not apply to a contract 
for the sale of goods. In the view of the majority of the Commissioners, 
the principal weakness of the parol evidence rule, as traditionally applied 
in England and Canada, has been the near-conclusive presumption of 
exclusiveness attached to formal instruments. If this hurdle is removed 
(and this, in our opinion, is all that the abolition of the parol evidence 



iSiSee, for example, Hunt Foods Industries, Inc. v. Doliner (1966), 270 N.Y.S. 
2d 937; Division of Triple T. Serv. Inc. v. Mobil Oil Corp. (1969), 304 N.Y.S. 
2d 191; Duesenberg and King, footnote 23 supra, p. 4-138. 

182 One of the Commissioners, the Honourable J. C. McRuer, dissents from this 
recommendation. In Mr. McRuer's view, the abolition of the parol evidence 
rule as expressed in section 4.6 of the Draft Bill would put the law of 
evidence, as it relates to the sale of goods, in great confusion. The jurispru- 
dence that has been developed over many years with respect to the evidentiary 
value of written agreements would be destroyed. This would provoke endless 
litigation. "The parol evidence rule does not apply to contracts for the sale of 
goods" is a colloquial expression to convey an idea. It is not suitable in any 
case for statutory form. Section 4.6 should be deleted from the Bill. Provision 
may be made in the statute to the effect that a term in a written contract for 
the sale of goods, that provides that "the writing represents the exclusive 
expression of the parties' agreement" may be held inoperative where the Court 
holds that to enforce the written contract would be oppressive to a party to the 
contract, having regard to all the circumstances. 



116 

rule implies) it merely clouds the issue to encumber the reform with the 
type of qualifying language used in the Code. The majority finds support 
for this conclusion in the apparent success with which the provisions 
abolishing the rule have been applied in The Business Practices Act and 
in comparable statutes elsewhere. 

It needs to be emphasized, however, as the English Law Commission 
also emphasized, 183 that the abolition of the parol evidence rule is not 
likely to effect a radical change. The courts will continue to attach very 
great weight, and rightly so, to written terms freely consented to by the 
parties; they will continue to express scepticism with respect to the con- 
sensual nature of unbargained terms contained in printed forms of agree- 
ment. The main difference is likely to be that there will be less frequent 
recourse to circumstances that now constitute exceptions to the rule, 
especially the exception based on collateral agreements. This result would 
follow because, in the light of the evidence, the court would find it easier 
than under existing law to hold that the writing could not have been 
intended as the final and exclusive expression of the parties' agreement. 

(d) CONSEQUENTIAL ISSUES 

We deal with two such issues. The first involves the conclusive char- 
acter of merger or integration clauses. In our opinion, it would be futile 
to abolish the parol evidence rule without also indicating the status of 
such clauses. Canadian courts have generally tended to take them at face 
value. 184 American courts have been divided in their approach, but those 
courts that have rejected the "four corners" rule have also rejected the 
conclusive character of merger clauses. 185 This seems to us to be correct 
in principle. We therefore recommend that a provision in a writing, pur- 
porting to state that the writing represents the exclusive expression of the 
parties' agreement, should have no conclusive effect. Our Draft Bill con- 
tains a provision to this effect. 186 An alternative approach would have 
been to let the general unconscionability provision in the revised Act 
police the reasonableness of such clauses. In view of the importance and 
ubiquitousness of merger clauses, however, we think it better to provide 
some specific guidance than to leave the question completely at large. 

The second issue is whether the abolition of the rule should be ac- 
companied by special provisions with respect to the position of third 
parties claiming rights under the writing. We have decided that this is not 
necessary for a number of reasons. First, the rule in equity is 187 that the 



i83Law Com. W.P. No. 70, footnote 160 supra, paras. 41-42. 

i84See, for example, Spelchan v. Long (1956), 2 D.L.R. (2d) 707 (B.C.C.A.); 
Dodds v. Millman (1964), 47 W.W.R. 690, 45 D.L.R. (2d) 472 (B.C.S.C); 
Advance Rumely Thresher Co. v. Keene, [1919] 2 W.W.R. 143, 47 D.L.R. 
251 (Sask. C.A.); and compare, Royal Bank of Canada v. Hale (1962), 30 
D.L.R. (2d) 138 (B.C.S.C). 

185 In addition to the authorities cited in footnote 163 supra, see Kupka v. Morey 
(1975), 17 U.C.C. Rep. 1383, especially at p. 1392 (Alaska Sup. Ct.), and 
Luther Williams Jr., Inc. v. Johnson (1967), 229 A. 2d 163 (D.C.C.A.). Com- 
pare, White & Summers, footnote 17 supra, p. 80. 

i86See, Draft Bill, s. 4.6. 

i8"7See, Treitel, footnote 157 supra, p. 468. 



117 

assignee of a chose in action (which includes, of course, an assignee of 
contract rights) takes subject to equities; hence, an assignee is already 
very vulnerable under existing law, and the abolition of the parol evidence 
rule will not change his position materially. For example, in an action by 
an assignee of the seller's right to payment, the buyer is free to allege 
that the goods were never delivered, were not satisfactory, or that the 
agreement was induced by misrepresentation. Another reason is that, in 
the comparable provision in section 4(7) of The Business Practices Act 
abolishing the parol evidence rule in consumer transactions, no exception 
is made in favour of third parties. 188 Further, the proposed provision only 
addresses itself to contracts of sale and does not purport to affect other 
transactions such as negotiable instruments, documents of title, or real 
estate conveyances where the rights of third parties do not depend upon 
equitable rules of assignment. A fourth reason is that, in sales situations, 
the problem is most likely to arise when an executed agreement has been 
discounted with a financial intermediary as, for example, in the case of 
consumer credit agreements and "factored" accounts. In such cases it is 
customary, or open, to the assignee to protect himself by various devices 
such as obtaining an acknowledgment of the account from the buyer, 
insertion of a "cut-off" clause in favour of the assignee, and the execution 
of a promissory note. The abolition of the parol evidence rule should not 
interfere with these practices. 189 Finally, in our view, if it is desired to 
attach negotiable incidents to particular types of writing, it should be done 
by other means. 

Accordingly, the Commission does not recommend that the abolition 
of the parol evidence^ule should be accompanied by special provisions 
with respect to the position of third parties claiming rights under the 
writing. 

8. Course of Performance and Construction of Agreement 

Anglo-Canadian and American law has long recognized the admis- 
sibility of trade usages and course of dealing between the parties in con- 
struing the terms of their agreement and filling gaps. We deal with these 
gap filling functions in chapter 8. Our present concern is with the 
admissibility of evidence that shows the manner in which the parties 
applied the agreement in practice as an aid in construing its terms. The 
English rule, 190 as reaffirmed by the House of Lords in Schuler A.G. v. 
Wickman Machine Tool Sales Ltd., 191 is that such evidence is not admis- 



i88Note, however, the restrictions in s. 4(l)(b) on the right to rescission of the 
agreement where a third party has acquired a right in the subject matter of the 
agreement. We do not pause to examine the implications of this restriction in 
consumer transactions, or how the provision is to be reconciled with s. 42a of 
The Consumer Protection Act, R.S.O. 1970, c. 82 as am. 

lg 9Such practices are, however, affected by statutory restrictions such as s. 42a of 
The Consumer Protection Act, supra, and Part V of the Bills of Exchange Act, 
R.S.C. 1970 (1st Supp.), c. 4, and the "joint venture" doctrine enunciated in 
Federal Discount Corp. Ltd. v. St. Pierre, [1962] O.R. 310 (C.A.). 

l90See, Fridman, The Law of Contract in Canada (1976), pp. 249-51. 
191 [1974] A.C. 235 (H.L.). 



118 

sible for this purpose; the Canadian jurisprudence is more liberal, 192 but 
could be affected by the reverse English trend. Under the Code such 
evidence is clearly admissible. Section 2-208 provides : 

(1) Where the contract for sale involves repeated occasions 
for performance by either party with knowledge of the nature of the 
performance and opportunity for objection to it by the other, any 
course of performance accepted or acquiesced in without objection 
shall be relevant to determine the meaning of the agreement. 

(2) The express terms of the agreement and any such course 
of performance, as well as any course of dealing and usage of trade, 
shall be construed whenever reasonable as consistent with each 
other; but when such construction is unreasonable, express terms 
shall control course of performance and course of performance shall 
control both course of dealing and usage of trade (Section 1-205). 

(3) Subject to the provisions of the next section on modifica- 
tion and waiver, such course of performance shall be relevant to 
show a waiver or modification of any term inconsistent with such 
course of performance. 

We believe the Code rule is much to be preferred and we recommend 
its adoption in the revised Act. 193 The reason given by Lord Reid in an 
earlier case 194 for rejecting evidence of course of performance was that, 
if such evidence were admissible, a contract might mean one thing the 
day it was signed, and something different a month or a year later. We 
agree with a learned commentator 195 that this fear is exaggerated and we 
believe that, in practice, the courts should have no difficulty in distinguish- 
ing between reliable and unreliable forms of post-formational evidence. 196 
It will be noted that UCC 2-208 ( 1 ) provides careful guidance as to what 
constitutes reliable evidence. In our view, the section provides adequate 
safeguards against the possibility that a contract breaker will seek to use 
his breaches as evidence of the meaning of the agreement or as evidence 
of a waiver or modification of it. 

It will also be observed that, under the Code, evidence of course of 
performance is not restricted to cases of ambiguous contractual language, 
as appears to be true in Canada. Comment 1 to UCC 2-208 justifies this 
liberalized approach on the ground that "The parties themselves know 



192 See, for example, Bank of Montreal v. Univ. of Saskatchewan (1953), 9 

W.W.R. 193 (Sask. S.C.); Man. Dev. Corp. v. Columbia Forest Products Ltd. 

(1973), 43 D.L.R. (3d) 107 (Man. C.A.); Re Canadian National Railway Co. 

and Canadian Pacific Ltd. (1978), 83 D.L.R. (3d) 86 (B.C.S.C.). 

i 9 3See, Draft Bill, s. 4.7. 

WtJames Miller & Partners Ltd. v. Whitworth Street Estates (Manchester) Ltd., 

[1970] A.C. 583 (H.L.), 603. 
195 Fridman, footnote 190 supra, p. 251. 

^Compare, Lord Denning, M.R., in Port Soudan Cotton Co. v. Chettiar and 
Sons, [1977] 2 Lloyd's Rep. 5 (C.A.), at 11: 

I am sorry about this [rule laid down in James Miller & Partners, foot- 
note 194 supra] because it is I believe contrary to the rule in every other 
civilised system of law, including the other countries of the Common 
Market. 



119 

best what they have meant by their words of agreement and their action 
under that agreement is the best indication of what that meaning was". 
The same rationale is used by the draftsmen in UCC 2-202 in admitting 
evidence of course of performance, as well as usage and course of dealing, 
to explain or supplement a written agreement. In neither case, however, 
is the admissibility unqualified; by virtue of UCC 2-208(2) the extrinsic 
evidence must be consistent with the express terms. If it is not, it cannot 
be received as evidence of the meaning of the express terms of the agree- 
ment, although, by UCC 2-208(3), it may be evidence of a waiver or 
modification of the inconsistent term. In practice, it may not always be 
easy to apply the distinction, but this difficulty is unavoidable. Subject 
to this caveat, we support also these features of UCC 2-208. 

9. Assignment of Rights and Delegation of Performance 197 

It is very common for a seller to assign his right to payment under 
a contract of sale. An assignment of this nature may be either a specific 
assignment, as under a factoring agreement, or by way of a general assign- 
ment of book debts to a bank or other financial intermediary to serve as 
security for a loan. In an important group of contracts, it is also common 
for a seller to delegate performance of some of his contractual duties; for 
example, the manufacture of components in a contract to supply a larger 
unit. It is less common for a buyer to assign his benefits under a contract 
of purchase. This situation may, however, arise should the buyer want to 
sell his business as a going concern or, in the case of a corporation, if 
there is a programme of corporate reorganization; or, again, the buyer 
may find it profitable to sell the contract without tying the assignment 
to a larger transaction. 

The Sale of Goods Act does not address itself to this group of ques- 
tions, but leaves them to be decided by the general law of assignments. 
In Ontario this implies a reference to the common law principles of as- 
signment, to section 54 of The Conveyancing and Law of Property Act, 19S 
and to The Personal Property Security Act. 199 Unfortunately, these sources 
are not fully integrated and are deficient in several respects: that is, they 
contain some important anomalies and fail to provide clear answers to 
some major questions. It is desirable, therefore, to discuss these problems 
briefly, to indicate how the corresponding questions have been answered 
in the Uniform Commercial Code, and to recommend desirable changes 
in Ontario law. As will be seen, the recommendations affect different 
facets of the law of assignments, and some bear more heavily on sales 
law than others. We are, therefore, of the view that, while an important' 
group of changes can be incorporated in the revised Act, others belong 
more appropriately to The Personal Property Security Act or should be 
incorporated in a Law of Contract Amendment Act. 

Accordingly, we now turn our attention to the following topics: (a) 
the formalities governing the assignment of rights; (b) the scope of The 

!97See, also, Christopher Carr, "Assignment of Choses in Action and Delegation 

of Performance", Research Paper No. III.8a. 
198R.S.O. 1970, c. 85. 
199R.S.O. 1970, c. 344 as am. 



120 

Personal Property Security Act in relation to assignments; (c) the status 
of 'no assignment' clauses; and, (d) the right of the original contracting 
parties to modify the terms of their contract after notice of an assignment 
has been given. To round off our survey, brief mention will also be made 
of several other provisions in UCC 2-210, which should be considered 
for inclusion in the revised Sale of Goods Act. 

(a) THE FORMALITIES OF ASSIGNMENT 

Existing Ontario law recognizes three forms of assignment of choses 
that are germane to contracts of sale. These are assignments in equity, 200 
the statutory form of assignment under section 54 of The Conveyancing 
and Law of Property Act, 201 and the provisions in The Personal Property 
Security Act. 202 The relevant provisions in The Personal Property Security 
Act 203 generally apply to all types of security interest in personal property, 
tangible or intangible, and also apply to an absolute assignment of book 
debts. 204 These provisions appear, however, to conflict in important re- 
spects with section 54 of The Conveyancing and Law of Property Act 205 
This is a matter that warrants further inquiry. The differences between 
the equitable form of assignment and the formalities necessary to comply 
with section 54 of The Conveyancing and Law of Property Act are also 
striking. An equitable assignment need not be in writing; it may comprise 
all or part of the chose and may be by way of charge or absolute; further, 
no notice is necessary to the obligor in order to perfect the assignment. 
Section 54 states converse rules on all these points. 

The differences would be understandable if they led to significant 
differences in result. But, as has been shown elsewhere, 206 the only appar- 
ent difference is procedural: an equitable assignee must as a general rule 
join the assignor in any action brought against the obligor whereas a 
statutory assignee can sue in his own name. Even this procedural distinc- 
tion may have disappeared in view of the provisions of Rule 89 of the 
Ontario Rules of Practice. 207 

If this conclusion is correct, section 54 is a formidable provision 



200Compare, Di Guilo v. Boland, [1958] O.R. 384, 13 D.L.R. (2d) 510 (C.A.). 

201 Supra, footnote 198. 

WlSupra, footnote 199, especially ss. 2 and l(y). 

203 That is, those involving the creation, perfection, priority and enforcement of 
the security interest. 

204See, s. 2(b). 

205Note, in particular, that under The Personal Property Security Act, registration 
of a financing statement, not notice to the account debtor, is necessary to per- 
fect an absolute or security interest in an intangible, and the assignment can 
be by way of charge or otherwise. Moreover, between assignor and assignee, 
even an oral assignment may be effective: see, The Personal Property Security 
Act, R.S.O. 1970, c. 344 as am., ss. 9, and 68; but see s. 11, which requires the 
secured party to deliver "a copy of the security agreement to the debtor within 
ten days after the execution thereof". Section 69 of the Act provides that, in 
the event of conflict between the statute and any other general or special Act, 
other than The Consumer Protection Act, The Personal Property Security Act 
is to prevail. 

206See, Carr, footnote 197 supra, pp. 7-8. 

207R u ] e 89 provides: "An assignee of a chose in action may sue in respect thereof 
without making the assignor a party." 



121 

which accomplishes very little. It seems to us that, if joinder of the 
assignor is desirable in certain types of assignments, it can be, and indeed 
already is, more efficiently handled by rules of court. The requirement 
ought not to turn on the accident of the form of assignment. The same 
observation could be made with respect to the need for written assign- 
ments. We therefore recommend a general review of the formalities 
governing assignments of choses in Ontario, with a view to their rationali- 
zation and modernization. 

(b) THE SCOPE OF THE PERSONAL PROPERTY SECURITY ACT 

The Personal Property Security Act applies to security interests in all 
forms of intangibles and, unlike The Assignments of Book Debts Act, 208 
which it replaces, applies to the specific assignment of a book debt as 
well as to a general assignment of book debts. 209 It also applies to., an 
absolute assignment of book debts, 210 and this could have some undesir- 
able consequences. Assume that a supplier assigns the right to payment 
under a requirements contract and also delegates his obligations under the 
contract. It is unlikely that the assignee would realize that The Personal 
Property Security Act governs the transaction, and that he must perfect 
the assignment in accordance with its provisions. Section 9- 104(f) of the 
Uniform Commercial Code excludes this type of assignment, as well as a 
number of other types of assignment not deemed to be of commercial 
importance, from the scope of Article 9, which deals with secured trans- 
actions. We recommend that consideration should be given to the insertion 
of a similar provision in The Personal Property Security Act. 

(c) THE STATUS OF 'NO ASSIGNMENT' CLAUSES 

It is quite common for agreements with public authorities, government 
departments, and other large scale buyers and suppliers to contain clauses 
prohibiting the assignment 'of the contract' without the other party's con- 
sent. The reasons for the presence of such clauses is explained by Gilmore 
in the following passage: 211 

Prohibitions of assignment have their principal commercial use 
in the case of obligors who have large numbers of creditors to deal 
with. There are public authorities, federal, state and municipal, 
dealing with contractors. There are prime or first-tier contractors 
dealing with sub-contractors. There are manufacturers dealing with 
suppliers of raw materials, component parts or sub-assemblies. There 
are banks dealing with holders of bank obligations. There are in- 
surance companies dealing with policy holders. It is easy to under- 
stand why obligors so situated are loath to be required to recognize 
claimants other than those they originally dealt with. Where thou- 
sands and tens of thousands of claims are involved, the mere book- 
keeping, if transfers must be recognized, becomes an expensive item 



208R.S.O. 1970, c. 33 as am. 

209See, The Personal Property Security Act, R.S.O. 1970, c. 344 as am., ss. 2(a) 

and l(y). 
noibid., s. 2(b). 
211 Gilmore, Security Interests in Personal Property (1965), Vol. 1, p. 214. 



122 

(but this, like any other business expense, translates itself into an 
element of price so that this objection is not to be taken seriously). 
When many claims are to be paid, it is inevitable that mistakes will 
be made, and if the obligor pays the wrong person he still owes the 
money to the rightful claimant (but in a large operation this, like 
the bookkeeping item, is a matter for cost accounting or insurance). 
Beyond clerical error and routine mistake, there is the problem of 
deciding whether an assignment is valid, under the law of some state 
or of a foreign country. Finally, under the normal rule of assign- 
ment law, the obligor will not be able to make set-offs against the 
assignee on account of claims or defenses against the assignor which 
arise after the obligor has received notification of the assignment. 
Quite naturally the obligor would prefer to avoid the fuss, the 
bother, the certainty of mistake, the duty of deciding difficult and 
obscure questions of law and the possibility of losing rights to resist 
payment. He therefore writes into his contract, letter of credit or 
insurance policy a clause to prohibit assignments made without his 
consent. 

This gives one side of the picture. The other side is even more compelling 
from the assignor's point of view. Prospective book debts constitute a very 
important form of collateral, and the bank or other lender often requires 
an assignment of book debts as a condition of making a loan to the 
supplier. Without access to such secured lines of credit, the supplier fre- 
quently would not be able to proceed with the contract. 

There is a surprising dearth of Anglo-Canadian case law 212 with 
respect to the validity, at common law, of clauses prohibiting assignments. 
As is shown elsewhere, 213 the few cases that do touch on the point are 
inconclusive. 214 There appears, however, to be a general willingness to 
circumvent such clauses without expressly declaring them to be ineffectual. 
The pre-Code American authorities were much more numerous, but equal- 
ly ambivalent. 215 Again, however, there were strong signs of a growing 
hostility towards recognition of 'no assignment' clauses in response to the 
economic need for free alienability. 216 

The Code has now firmly swung its support in favour of the free 
alienability of earned rights under contracts of supply and purchase, as 
may be seen from the following provisions: 

Section 2-210(2) of the Code provides: 

(2) Unless otherwise agreed all rights of either seller or buyer 



2i2See, for example, Re Turcan (1888), 40 Ch. D. 5 (C.A.); Spellman v. Spell- 
man, [1961] 1 W.L.R. 921, [1961] 2 All E.R. 498 (C.A.); Wickham Holding 
v. Brooke House Motors, [1967] 1 W.L.R. 295, [1967] 1 All E.R. 117 (C.A.). 
The last two cases involved hire-purchase agreements and are not very helpful 
in determining the validity of 'no assignment' clauses in agreements creating 
book debts. There appear to be no Canadian cases directly on point. 

213 See, Carr, footnote 197 supra, pp. 25-28. 

2 * 4 See now, however, Helstan Securities Ltd. v. Hertfordshire County Council, 
[1978] 3 All E.R. 262 (Q.B.). 

215 See, Gilmore, footnote 211 supra, sec. 7.6. 

2i6See, UCC 9-318, Comment 4, paras. 4-5. 



123 

can be assigned except where the assignment would materially 
change the duty of the other party, or increase materially the burden 
or risk imposed on him by his contract, or impair materially his 
chance of obtaining return performance. A right to damages for 
breach of the whole contract or a right arising out of the assignor's 
due performance of his entire obligation can be assigned despite 
agreement otherwise. (Emphasis added.) 

UCC 9-318 provides: 

(4) A term in any contract between an account debtor and an 
assignor is ineffective if it prohibits assignment of an account or 
prohibits creation of a security interest in a general intangible for 
money due or to become due or requires the account debtor's con- 
sent to such assignment or security interest. 217 

We deal hereafter with the first sentence of UCC 2-210(2), and our 
present discussion is confined to the second sentence and to UCC 
9-318(4). Ontario law, including The Personal Property Security Act, 
contains no corresponding provisions. 218 It will be noted that, while the 
two subsections overlap to a substantial extent, they are not identical. 
Section 9-318(4), which is part of the Code's chapter on secured trans- 
actions, only applies to a prohibition affecting the assignment of an ac- 
count, whereas section 2-210(2) covers the assignment of both a right 
to damages and a right arising out of the assignor's performance of his 
entire obligation. It seems, therefore, on a literal reading of the last 
sentence of section 2-210(2), that a buyer would be free to assign the 
right to delivery of goods for which payment has been made. Whether 
the draftsmen intended such a result is not clear. In principle, however, 
there is no reason why the avoidance of 'no assignment' clauses should 
be restricted to an assignment of accounts. Another distinction between the 
two subsections arises out of the limitation of section 2-210(2) to rights 
that have been earned, although it is difficult to gauge its precise impact. 

We are of the view that the principle enshrined in section 9-318(4) 
is sound and that, in the modern commercial context, the creditor's right 
to deal freely with rights to payment is more important than the account 
debtor's administrative convenience. We are fortified in our position by 
the fact that UCC 9-318(4) has now been in force in many of the 
American states for twenty-five or more years. We also deem it significant 
that an earlier version of UCC 9-318(4) is now in force in Manitoba. 



217" Account debtor" is defined in UCC 9-105(1) (a); "account" and "general in- 
tangibles" are defined in UCC 9-106. The current version of UCC 9-318(4) 
differs somewhat from the pre- 1972 Official Text. The pre- 1972 version read: 
(4) A term in any contract between an account debtor and an assignor 
which prohibits assignment of an account or contract right to which 
they are parties is ineffective. 
The reasons for the change are explained in the Appendix to the 1972 Official 
Text, "Reasons for 1972 Change", accompanying UCC 9-318. 
21 8Note, however, that section 40(4) of the Manitoba Personal Property Security 
Act, S.M. 1973, c. 5, substantially reproduces the pre-1972 Code version of UCC 
9-318(4). The Manitoba provision is apparently based on section 40(4) of the 
Model Uniform Personal Property Security Act adopted by the Canadian Bar 
Association in September, 1970. 



124 

We therefore recommend the addition to section 40 of The Personal Prop- 
erty Security Act of a provision comparable to UCC 9-318(4). We also 
recommend the insertion in the revised Sale of Goods Act of a provision 
comparable to the second sentence of UCC 2-210(2). 219 This double 
barrelled approach is necessary to take care of those forms of assignment 
not caught by the definitions of "account" and "contract right" in Article 
9 and in their Ontario counterparts. 220 In recommending this approach we 
assume that effect will also be given to our earlier recommendation con- 
cerning the adoption of a clause similar to UCC 9-104(f ) . 

(d) MODIFICATION OF CONTRACTUAL RIGHTS AFTER ASSIGNMENT 221 

The general rule is that an assignee takes subject to such equities as 
may exist between the obligor and assignor at the time the obligor is 
notified of the assignment, but that he does not take subject to equities 
that may arise after this event. The meaning of equities in this context is 
not free of ambiguity. Leaving aside this difficulty, however, it will be seen 
that, if applied strictly, the rule could preclude, so far as the rights of 
assignees are concerned, bona fide modifications to the contract made after 
assignment. Apparently, this was the view held by a divided court in 
Brice v. Bannister. 121 Apart from this decision, there appears to be no 
Anglo-Canadian authority that deals squarely with the question whether 
bona fide modifications or substitutions under the contract, after the right 
to payment has been assigned, are effective against the assignee, and the 
matter must be regarded as unsettled. A reasonable interpretation of the 
parties' intention, as well as everyday commercial practice, suggests that 
an assignment is not meant to freeze rights and obligations under a con- 
tract that is still executory. Moreover, these factors suggest that the original 
contracting parties should be free to make legitimate adjustments until 
such time as the assigned right has fully matured. This is what UCC 
9-318(2) provides with respect to the right to payment under an assigned 
contract: 



2 i9See, Draft Bill, s. 4.9(3). 

220 The provisions of The Personal Property Security Act on this point are unclear. 
The Act does not, it would seem, use the term "contract right". The term "ac- 
count" does appear in the Act, but is not defined. "Account debtor", which is 
the expression used in section 40 of the Act, is defined in section 1(b) as "a 
person who is obligated on chattel paper or on an intangible". "Intangible" is 
defined in s. l(m) as meaning "all personal property, including choses in action 
that is not goods, chattel paper, documents of title, instruments or securities". 
When read in conjunction with s. 40, which is the counterpart to UCC 9-318, 
this might suggest a much broader reach to s. 40 than is expressed in the Code 
version and would extend its provisions to assignments of all forms of things in 
action, whether or not by way of security. 

However, this broad construction is difficult to reconcile with s. 2(b) of The 
Personal Property Security Act which, so far as absolute assignments are con- 
cerned, confines the Act to an assignment of book debts "not intended as se- 
curity". "Book debts" is not defined. Presumably, therefore, s. 40 was also in- 
tended to be restricted to an assignment by way of security and to absolute 
assignments of book debts. 

221 See, Carr, footnote 197 supra, pp. 41-50. 

222(1878), 3 Q.B.D. 569. 



125 

(2) So far as the right to payment or a part thereof under an as- 
signed contract has not been fully earned by performance, and not- 
withstanding notification of the assignment, any modification of or 
substitution for the contract made in good faith and in accordance 
with reasonable commercial standards is effective against an assignee 
unless the account debtor has otherwise agreed but the assignee 
acquires corresponding rights under the modified or substituted con- 
tract. The assignment may provide that such modification or sub- 
stitution is a breach by the assignor. 

For some unexplained reason, this provision, too, was omitted from sec- 
tion 40 of The Personal Property Security Act. However, it has been ad- 
opted in the Model Uniform Personal Property Security Act 223 and has 
been recommended for adoption in British Columbia 224 and Saskatche- 
wan. 225 We believe it to be a very useful provision and we recommend its 
adoption in Ontario. 

(e) OTHER ASPECTS OF UCC 2-210 

Section 2-210 contains several other provisions, some declaratory of 
the existing law, and others as aids in construction. Subsection (1) pro- 
vides as follows: 

(1) A party may perform his duty through a delegate unless other- 
wise agreed or unless the other party has a substantial interest in 
having his original promisor perform or control the acts required by 
the contract. No delegation of performance relieves the party dele- 
gating of any duty to perform or any liability for breach. 

This provision also reflects the Anglo-Canadian position. 226 We consider 
that a similar provision could usefully be incorporated in the revised Act 
as part of a section dealing with various facets of assignment. 

Subsection (2) of UCC 2-210 has already been quoted, and we 
have previously recommended adoption of the second sentence of the 
subsection. The first sentence deals with the assignability of the rights of 
a buyer or seller, which have not yet been earned by performance, and 
restrictions on the right to assign; namely, where the assignment would 
"materially change the duty of the other party, or increase materially the 
burden or risk imposed on him by his contract, or impair materially his 
chance of obtaining return performance". These restrictions appear to 
correspond with the restrictions obtaining under the existing Anglo-Cana- 
dian law. 227 In our view, the first sentence forms a logical complement to 

223S. 40(2). The Act was drafted by a Committee of the Canadian Bar Associa- 
tion and was adopted by the Association in 1970. See, Ziegel, "The Model Uni- 
form Personal Property Security Act" (1971), 78 Can. Banker 16. The Act is 
currently being revised. 

224 Law Reform Commission of British Columbia, Report on Debtor-Creditor Re- 
lationships, Pt. V — Personal Property Security (1975), Appendix A, s. 40(2). 

225Law Reform Commission of Saskatchewan, Proposals for a Saskatchewan 
Personal Property Security Act (July, 1977), s. 40(2). 

226 See, Waddams, footnote 157 supra, p. 361. 

22 7See, Treitel, The Law of Contract (4th ed., 1975), at pp. 472-74; Fridman, The 
Law of Contract in Canada (1976), at pp. 442-44; Kemp. v. Baerselman, 
[1906] 2 K.B. 604 (C.A.); and, compare, Tolhurst v. Assoc. Portland Cement 
Co., [1903] A.C. 414 (H.L.). 



126 

the second sentence of UCC 2-210(2), and we recommend the adoption 
of a similar provision in the revised Ontario Act. 228 Subsections (3) and 
(4) deal largely with questions of construction and provide as follows: 

(3) Unless the circumstances indicate the contrary a prohibition 
of assignment of 'the contract' is to be construed as barring only the 
delegation to the assignee of the assignor's performance. 

(4) An assignment of 'the contract' or of 'all my rights under the 
contract' or an assignment in similar general terms is an assignment 
of rights and unless the language or the circumstances (as in an 
assignment for security) indicate the contrary, it is a delegation of 
performance of the duties of the assignor and its acceptance by the 
assignee constitutes a promise by him to perform those duties. This 
promise is enforceable by either the assignor or the other party to the 
original contract. 

The point has been made to us 229 that subsection (3) is superfluous. This 
would be a persuasive argument if assignment clauses were always clearly 
drafted; the evidence, however, is otherwise. 230 We therefore favour adopt- 
ing the subsection. Objection has also been raised 231 to the concluding sen- 
tence in subsection (4), on the ground that it deals with an aspect of a 
wider problem that should form part of a general review of the law of 
third party beneficiaries. As indicated hereafter, 232 we support the desir- 
ability of such a general review, but it may take some time to complete. 
In the meantime, we see considerable merit in adopting the Code provi- 
sion, particularly in view of the fact that there is already important prece- 
dent for it in section 19 of the Ontario Mortgages Act. 233 

Subsection (5) introduces a principle that is new to Anglo-Canadian 
law. It provides as follows: 

(5) The other party may treat any assignment which delegates per- 
formance as creating reasonable grounds for insecurity and may with- 
out prejudice to his rights against the assignor demand assurances 
from the assignee (Section 2-609). 

It will be observed that the provision is only a particularized application 
of the general right of a party who feels himself insecure to obtain an 



228See, Draft Bill, s. 4.9(2). 

229 Carr, footnote 197 supra, p. 56. 

23 °Duesenberg and King, footnote 23 supra, p. 4-78. 

231 Carr, footnote 197 supra, p. 57. 

232 //i/ra, this chapter, sec. 10. 

233 R.S.O. 1970, c. 279, s. 19, discussed in Rayner & McLaren, Falconbridge on 

Mortgages (4th ed., 1977), pp. 306 et seq. See also Restatement of the Law, 

Contracts 2d, Tent. Draft, s. 160(2). 



127 

adequate assurance of performance under section 2-609 of the Code. 234 
The general principle is sound and is supported later in this Report. 235 
Subsection (5), however, raises a point that requires consideration at this 
stage: namely, whether the subsection is justified in treating delegation of 
performance as automatically creating grounds for insecurity by the other 
contracting party. Prima facie, one would have thought that subsections 
(1) and (2) provide sufficient protection and that, in cases not falling 
within these provisions, the burden should rest on the other contracting 
party to justify his demand, as is generally true under UCC 2-609. The 
Code explains the distinction 236 on the ground that "the non-assigning 
original party has a stake in the reliability of the person with whom he 
has closed the original contract and is, therefore, entitled to due assur- 
ance that any delegated performance will be properly forthcoming". This 
argument almost proves too much and, if carried to its logical conclusion, 
would substantially reduce the value of the power to delegate performance. 
However, subsection (5) has won the support of commentators 237 and 
does not appear to have created difficulties in practice. A majority of the 
Commissioners 238 support it on this ground, as well as on the ground that, 
since we have recommended adoption of the other parts of section 2-210, 
there is a persuasive argument for maintaining uniformity on this point 
as well. 

In summary, we recommend adoption in Ontario of provisions similar 
to UCC 2-210(1), (2), first sentence, (3), (4) and (5), and our Draft 
Bill so provides. 239 



234TJCC 2-609 provides: 

(1) A contract for sale imposes an obligation on each party that the 
other's expectation of receiving due performance will not be impaired. When 
reasonable grounds for insecurity arise with respect to the performance of 
either party the other may in writing demand adequate assurance of due 
performance and until he receives such assurance may if commercially rea- 
sonable suspend any performance for which he has not already received the 
agreed return. 

(2) Between merchants the reasonableness of grounds for insecurity and 
the adequacy of any assurance offered shall be determined according to 
commercial standards. 

(3) Acceptance of any improper delivery or payment does not prejudice 
the aggrieved party's right to demand adequate assurance of future perform- 
ance. 

(4) After receipt of a justified demand failure to provide within a rea- 
sonable time not exceeding thirty days such assurance of due performance 
as is adequate under the circumstances of the particular case is a repudia- 
tion of the contract. 

KHnfra, C h. 18. 

236TJCC 2-210, Comment 6. 

237Duesenberg and King, footnote 23 supra, pp. 4-79/80. 

238T wo of the Commissioners, the Honourable Richard A. Bell and Mr. W. Gibson 
Gray, do not agree that delegation of performance should be treated as auto- 
matically creating grounds for insecurity. Rather, they would require that the 
non-assigning party have reasonable grounds for insecurity arising out of the 
assignment delegating performance before he or she is entitled to demand 
assurances of performance. 

239See Draft Bill, s. 4.9(1), (2), (4), (5) and (7) respectively. 



128 

10. Privity of Contract and Contracts For The Benefit of 
Third Parties 

This important topic is the subject of a separate research paper pre- 
pared for the Commission. 240 Subject to a substantial number of excep- 
tions, it would appear that the common law rule is still solidly entrenched 
in England and Canada, that no one may sue or be sued on a contract, or 
enforce a benefit or be subjected to a burden as a result of a contract, 
unless he is a party to it. This is the familiar doctrine of privity of con- 
tract. 

The doctrine has been frequently criticized and its abolition was 
recommended in England before the war by the Law Revision Com- 
mittee. 241 The research paper prepared for the Commission finds much of 
the criticism justified, and contains a detailed consideration of the basis 
of desirable reform and the rules governing the new tripartite relation- 
ship. The paper also concludes, 242 however, that the doctrine of privity 
has no uniquely sale of goods dimension, and that the basic changes 
should be introduced in a Law of Contract Amendment Act or similar 
enactment of general application. 

The Commission agrees with this conclusion, subject to two qualifi- 
cations. As previously indicated, where the assignee of contractual rights 
has also undertaken to perform the assignor's duties, we favour allowing 
the obligee to enforce the undertaking directly against the assignee. The 
second qualification involves the rights of parties other than the original 
buyer to enforce express and implied warranties given by a previous seller. 
In its Report on Consumer Warranties and Guarantees, 2 ^ the Commis- 
sion recommended some important changes in the privity doctrine from 
this point of view. We have considered whether similar changes should be 
made in the general law of sale and, as will be seen later, 244 give a favour- 
able but heavily circumscribed answer. 

RECOMMENDATIONS 

The Commission makes the following recommendations: 

1. Section 3 of The Sale of Goods Act dealing with capacity to con- 
tract and contracts with minors and other persons under con- 
tractual disability should be retained in the revised Act until such 
time as comprehensive legislation dealing with contracts with 
persons under contractual disability is adopted. 

2. The revised Act should contain provisions, similar in intent to 
those in UCC 2-206, to clarify and modernize existing rules with 
respect to acceptance by performance. We favour a synthesized 
version of UCC 2-206 and sections 56(2) and 63 of the Second 
Restatement on Contracts, so that the meaning of the new pro- 



240Carr, "Privity of Contract", Research Paper No. 11.6. 

^Law Revision Committee, Sixth Interim Report, footnote 59 supra, paras. 41-49. 

MlSupra, footnote 240, p. 87. 

UlSupra, footnote 172, at pp. 76 et seq. 

2 ^Infra, ch. 10. 



129 

visions will be clear to the Ontario practitioner, without the need 
for extended research into their American origins and judicial 
interpretation. In particular, the new section should provide that, 
unless otherwise indicated by the language or circumstances, 

(a) (i) an offer to make a contract shall be construed as invit- 

ing acceptance in any manner and by any medium rea- 
sonable in the circumstances including performance of 
the requested act; 

(ii) an order or other offer to buy goods for prompt or cur- 
rent shipment shall be construed as inviting acceptance 
either by a prompt promise to ship or by the prompt or 
current shipment of conforming or non-comforming 
goods, except that a shipment of non-conforming goods 
shall not be treated as an acceptance if the seller sea- 
sonably notifies the buyer that the shipment is offered 
only as an accommodation to the buyer; 

(b) where an offer is accepted by performance and the offeree 
has reason to know that the offeror has no adequate means 
of learning of the performance with reasonable promptness 
and certainty, the contractual duty of the offeror shall be 
discharged 

(i) unless the offeree exercises reasonable diligence to 

notify the offeror of acceptance; 
(ii) unless the offeror learns of the performance within a 

reasonable time; or 
(hi) unless the offer indicates that notification of acceptance 
is not required; 

(c) where an offer invites an offeree to choose between accep- 
tance by promise and acceptance by performance, the tender 
or beginning of the invited performance or a tender of a 
beginning of it is an acceptance by performance; and 

(d) such an acceptance shall operate as a promise to render 
complete performance. 

3. (a) With the exception of subsection (3), the provisions of UCC 

2-207 dealing with the use of conflicting forms to record 
the terms upon which the parties are willing to enter into a 
contract, should not be adopted in the revised Act. This 
recommendation is without prejudice to further study of the 
problem in the Law of Contract Amendment Project. 

(b) A provision similar to subsection (3) of UCC 2-207 should 
be included in the revised Act as a means of construing the 
terms of a contract where the parties have exchanged con- 
flicting forms, but have proceeded to act as if there were a 
binding contract. 

4. Sales by auction should be dealt with in a revised version of 
section 56 of the existing Act, which should incorporate the 
following new features: 



130 

*(a) A sale by auction shall be deemed to be with reserve unless 
the goods are put up without reserve; 

(b) It should be made clear that, in an auction without reserve, 
after the auctioneer calls for bids on an article or lot, that 
article or lot cannot be withdrawn unless no bid is made 
within a reasonable time; 

**(c) The section should provide that in an auction with or with- 
out reserve the bidder may retract his bid until the auc- 
tioneer announces the completion of the sale, and that a 
bidder's retraction does not revive any previous bid; 

(d) Where a seller makes a secret bid at an auction, the remedies 
of the buyer should be clarified so as to encompass the right 
to recover damages or claim an abatement in the price, as 
well as to avoid the sale; and 

(e) The prohibition against a seller making an undisclosed bid 
should not apply in the case of a forced sale. 

5. An offer by a merchant to buy or sell goods which expressly 
provides that it will be held open should not be revocable for 
lack of consideration during the time stated or, if no time is stated, 
for a reasonable period not to exceed three months. 

***6. Writing should not be a condition of enforceability of a firm offer 
not supported by consideration. 

7. The revised Act should include a provision, similar to UCC 
2-209, abolishing the need for consideration to support an agree- 
ment made in good faith modifying the terms of an existing con- 
tract. 

****8. Such an agreement should not be required to be in writing un- 
less the contract being modified contains such a requirement. 

9. The revised Act should make it clear, following UCC 2-209(4) 
and (5), that, even though an attempt at modification or res- 
cission of the contract does not satisfy the requirement for a 
signed writing in the original agreement, it may operate as a 
waiver or equitable estoppel. 

10. Section 16 of The Mercantile Law Amendment Act should be 
deferred for study by the Law of Contract Amendment Project. 

11. A provision similar to UCC 2-203 depriving a sealed writing 
evidencing a contract of sale of any special effect should not be 
included in the revised Act. Any change in the law of sealed 
writings should await the outcome of a comprehensive review 



*The Honourable Richard A. Bell and the Honourable J. C. McRuer dissent 
from this recommendation. See footnote 49, supra. 
**The Honourable Richard A. Bell dissents from this recommendation. See 
footnote 57, supra. 
***The Honourable J. C. McRuer and W. Gibson Gray dissent from this 
recommendation. See footnote 73, supra. 
****The Honourable J. C. McRuer and W. Gibson Gray dissent from this 
recommendation. See footnote 116, supra. 



131 

of the doctrine of consideration and the enforceability of gra- 
tuitous promises. 

12. With respect to the doctrine of mistake in the law of sales: 

(a) A provision similar to UCC 2-613 should be adopted in 
the revised Act in place of section 7 of The Sale of Goods 
Act with respect to the effect of the parties' mistaken as- 
sumption as to the existence of the goods. The new sec- 
tion should, however, make it clear that its provisions can 
be rebutted by evidence of a contrary intention by the 
parties, and that the seller will not be excused from non- 
performance if he has behaved negligently. 

(b) The distinction between void and voidable titles arising 
from a mistake with respect to the identity or attributes of 
the other contracting party should be abolished, and all 
such mistakes should be treated as creating a voidable 
title. 

(c) Wider proposals for reform of the doctrine of mistake 
should be deferred for study by the Law of Contract 
Amendment Project. 

13. (a) The Statute of Frauds provision, contained in section 5 of 

the existing Act, should be omitted from the revised Sale 
of Goods Act. 

(b) This recommendation is confined to contracts for the sale 
of goods, and no opinion is expressed with respect to the 
desirability of retaining Statute of Frauds requirements 
with respect to other types of contract. 

*****14. The parol evidence rule should not apply to contracts for the 
sale of goods, and a provision in a writing purporting to state 
that the writing represents the exclusive expression of the 
parties' agreement should have no conclusive effect. 

15. Abolition of the parol evidence rule need not be accompanied 
by special provisions dealing with the position of third parties 
claiming rights under a written contract of sale. 

16. As an aid in construing the terms of an agreement and es- 
tablishing the relative priority of express terms, course of per- 
formance, course of dealing and usage of trade, there should 
be included in the revised Act provisions, comparable to those 
contained in UCC 2-208, admitting evidence of how the 
parties applied the agreement in practice. 

17. There should be a general review of the formalities govern- 
ing assignments of choses in action in Ontario with a view to 
their rationalization and modernization. 

18. The transfer of a right to payment under a contract to an 
assignee who is also to perform the obligations under the con- 



*****The Honourable J. C. McRuer dissents in part from this recommendation. 
See footnote 182, supra. 



132 

tract, should be excluded from the operation of The Personal 
Property Security Act. Accordingly, consideration should be 
given to the inclusion in that Act of a provision similar to UCC 
9-104(f). 

19. In order to permit creditors to deal freely with rights to pay- 
ment, terms in a contract of sale prohibiting assignment of 
accounts should be rendered ineffective. Accordingly, 

(a) a provision comparable to UCC 9-318(4) should be 
added to section 40 of The Personal Property Security 
Act; and, 

(b) a provision along the lines of the second sentence of UCC 
2-210(2) should be inserted in the revised Sale of Goods 
Act. 

20. In order to make it clear that bona fide modifications of, or 
substitutions for, a contract after the right to payment has been 
assigned are effective against the assignee, a provision com- 
parable to UCC 9-318(2) should be included in The Personal 
Property Security Act. 

21. There should be included in the revised Sale of Goods Act 
the following features of UCC 2-210: 

(a) subsection (1), which reflects the existing law concern- 
ing delegation of performance; 

(b) subsection (2), first sentence, which reflects existing law 
concerning the assignability of the rights of a buyer or 
seller, other than rights earned by performance, and the 
restrictions thereon; 

(c) subsection (3), dealing with the construction of terms 
prohibiting assignment of "the contract"; 

(d) subsection (4), dealing with the construction of an assign- 
ment of "the contract" or of "all my rights under the con- 
tract" or similar terms; 

******(e) subsection (5), entitling the other party to a contract to 
treat an assignment delegating performance as creating 
reasonable grounds for insecurity and to demand assur- 
ances from the assignee. 

22. Because the doctrine of privity of contract has no unique sale 
of goods dimension, any basic changes in the doctrine, so far 
as it affects the rights of third parties should, with two excep- 
tions, be introduced in a Law of Contract Amendment Act or 
similar enactment of general application. The exceptions to 
this recommendation involve assignments of contractual rights 
where the assignee has also undertaken to perform the as- 
signor's duties, and the rights of parties other than the original 
buyer to enforce warranties given by a previous seller. 



******The Honourable Richard A. Bell, and W. Gibson Gray dissent from this 
recommendation. See, footnote 238, supra. 



PART IV 

GENERAL OBLIGATIONS AND CONSTRUCTION 
OF THE CONTRACT 



Introduction 

Every contract of sale contains a common core of obligations. Ex- 
pressed succinctly, the seller's obligation is to deliver goods of the right 
quantity, quality and description and at the right time and place; the 
buyer's obligations are to accept delivery and to pay for the goods. It is 
rare for the parties to spell out in detail their respective obligations, and 
one of the tasks long assumed by the courts has been to fill in the gaps 
where the contract itself is silent. Alternatively, the courts have been re- 
quired to flesh out the skeletal provisions of a contract where they lack 
sufficient detail. 

The Sale of Goods Act codified the results of this judicial activity, 
but not exhaustively. Article 2 has built upon this base, but has enlarged 
it considerably in at least three directions: namely, (a) by adding to the 
number of implied terms or providing constructional rules for the inter- 
pretation of express terms; (b) by imposing important behavioural base- 
lines of reasonableness and fairness, and indicating more specifically the 
admissibility of disclaimer clauses; and, (c) by attempting to provide a 
bridge between traditional sales law and the newly burgeoning area of 
products liability law. 

Several important obligational and constructional questions have 
already been dealt with in the preceding parts of this Report. Others will 
be examined in Part V. This part of the Report will confine its attention 
to the following topics: (1) the definition of express warranty and the 
classification of contractual obligations; (2) doctrines of unconscion- 
ability and good faith as imposing restrictions on the parties' freedom of 
contract, and as providing baselines for the performance and enforcement 
of contractual and statutory rights and duties; (3) some specific con- 
structional issues arising in important types of contract, as well as the role 
of usages of trade and course of dealing in supplementing express terms; 
(4) the seller's implied warranties and the treatment of disclaimer clauses; 
and, (5) express and implied warranties and the doctrine of privity. Some 
of these questions were also examined in 1972 in our Report on Consumer 
Warranties and Guarantees in the Sale of Goods. It is not necessary, 
therefore, to retrace the same ground in detail. We must, however, take 
into consideration subsequent developments, and indicate to what extent 
different rules may be desirable for consumer and non-consumer transac- 
tions. 



[133] 



CHAPTER 6 



DEFINITION OF EXPRESS WARRANTY 
AND CLASSIFICATION OF 
CONTRACTUAL OBLIGATIONS 



A. DEFINITION OF EXPRESS WARRANTY 

1. Recapitulation 

It is customary to think of a contract of sale as a discrete phenom- 
enon, occurring within an easily identifiable time frame and isolated from 
all distracting influences. 1 This legal model gives a very incomplete picture 
of what frequently happens in practice. If the parties have entered into 
a formal contract, it may well have been preceded by lengthy negotiations. 
Further, whether or not there is a written contract, the decision by the 
seller or the buyer to enter into contractual relations will often be influ- 
enced by representations of one kind or another, whether conveyed ver- 
bally or through such written media as advertisements, sales literature, 
catalogues, or personal correspondence. This phenomenon raises two 
important questions. The first is to what extent evidence of such repre- 
sentations is admissible. This question has been discussed earlier. 2 The 
second question may be stated in this way: to what extent can the repre- 
sentations be treated as terms of the contract or, more accurately, as ex- 
press warranties. To this latter question we now turn our attention. 

The distinction between contractual and non-contractual representa- 
tions is an important one. As we have pointed out in our Report on Con- 
sumer Warranties and Guarantees, 3 where there is breach of a non-con- 
tractual representation the representee's remedy is normally restricted to 
the equitable remedy of rescission; that is, unless the representor has been 
guilty of fraud or of negligence under the Hedley Byrne doctrine. 4 Breach 
of a term of the contract, on the other hand, will entitle the buyer to sue 
for damages or to rescind and sue for damages depending on the char- 
acterization of the term that has been breached. The authoritative rule 
adopted by the House of Lords in Heilbut, Symons & Co. v. Buckleton, 5 
is that a mere affirmation of fact does not become a term of the contract, 
unless it was intended to be promissory in character. This test is both 
elusive and difficult to apply in practice, and it has been frequently criti- 



!For a general discussion of the classification of contractual and non-contractual 
obligations, see, Waddams, "The Classification of Contractual and Non-Con- 
tractual Obligations", Research Paper, No. III.2. 

2 Supra, ch. 5, sec. 7. 

3 Ontario Law Reform Commission, Report on Consumer Warranties and Guar- 
antees in the Sale of Goods (1972), ch. 2, section 1, pp. 28-29. 

*Hedley, Byrne & Co. Ltd. v. Heller & Partners Ltd., [1964] A.C. 465 (H.L.). 
Concerning the application of the doctrine in a contractual setting, see infra, 
this chapter, section A. 2-3. 

5[1913] A.C. 30 (H.L.). 

[135] 



136 

cized. 6 The Warranties Report therefore recommended 7 the abolition of 
this test and the substitution in its place of the following definition of war- 
ranty found in section 12 of the Uniform Sales Act: 

Any affirmation of fact or any promise by the seller relating to the 
goods is an express warranty if the natural tendency of such affirma- 
tion or promise is to induce the buyer to purchase the goods, and if 
the buyer purchases the goods relying thereon. 

Our Report did not favour the compromise solution adopted in the U.K. 
Misrepresentation Act 1967, and we thought that section 12 was pre- 
ferable to the more obscure definition in section 2-313(1) (a) of the Uni- 
form Commercial Code. That section provides as follows: 

2-313(1) (a) Any affirmation of fact or promise made by the seller 
to the buyer which relates to the goods and becomes part of the 
basis of the bargain creates an express warranty that the goods shall 
conform to the affirmation or promise. 

The Commission's recommendations on this point appear to have been 
substantially implemented in Bill 110, introducing The Consumer Products 
Warranties Act, 1976* The Bill has not, however, been enacted. 

With the aid of a background research paper, 9 we have re-examined 
this question from the perspective of general sales law. Subject to the 
qualifications noted hereafter, we have reached the conclusion that a 
similar definition of express warranty should be adopted in the revised 
Sale of Goods Act. The New South Wales Working Paper 10 contains a 
similar recommendation. We do not anticipate that our recommendation 
will make much practical difference in the case of representations made by 
merchant sellers, since both Canadian and English courts have shown a 
ready willingness to characterize such representations as warranties and, 
indeed, have intermittently used language similar to the American reliance 
test. 11 Our recommendation may, however, effect a change in the case 
of representations by non-merchant sellers, since the courts have evinced a 

6See, for example, Allan, "The Scope of the Contract" (1967), 41 A.LJ. 274; 
Sutton, "Reform of the Law of Sales" (1969), 7 Alta. L. Rev. 130; and, com- 
pare, Greig, "Misrepresentations and Sales of Goods" (1971), 87 L.Q.R. 179. 
See also Esso Petroleum Ltd. v. Mardon, [1976] Q.B. 801, at p. 817, [1976] 
2 All E.R. 5 at p. 13 (C.A.), per Lord Denning, M.R. 

1 Supra, footnote 3, at p. 29. 

SBill 110, 3rd. Sess., 30th Legislature. S. 1(1) (c) of the Bill defined "express 
warranty" as "an affirmation of fact or promise relating to the quality, condi- 
tion, quantity, performance or efficacy of a consumer product or relating to its 
use and maintenance where the tendency of such affirmation is to induce the 
buyer to purchase the consumer product". See, also, the broad definition of 
"express warranty" in the Saskatchewan Consumer Products Warranties Act, 
1977, S.S. 1976-77, c. 15, s. 8. 

9 Supra, footnote 1. 

l°Law Reform Commission, New South Wales, Working Paper on the Sale of 
Goods (1975), para. 3.44. 

^Benjamin's Sale of Goods (1974), para. 746; New South Wales Working Paper, 
supra, para. 3.37; Quaker Oats Co. of Canada Ltd. v. Kitzul (1966), 53 D.L.R. 
(2d) 630 (Sask. Q.B.); Sealand of the Pacific Ltd. v. Ocean Cement Ltd. 
(1973), 33 D.L.R. (3d) 625 (B.C.S.C), affd in part and rev'd in part sub nom. 
Sealand of the Pacific v. Robt. C. McHaffie Ltd. (1974), 51 D.L.R. (3d) 702 
(B.C.CA.). 



137 

greater reluctance to characterize representations of this kind as war- 
ranties. 12 However, we would expect the change to be beneficial because, 
by characterizing the representation as a warranty, the courts would have 
at their disposal a wider range of remedies. Further, while our conclu- 
sion in favour of the Uniform Sales Act test is based on principle and not 
simply a desire for consistency (either between related Ontario legislation 
or between Ontario law and the law of other jurisdictions), it would ob- 
viously create difficulties if substantially different tests were adopted for 
consumer and non-consumer warranties. 

In our opinion, it would not be satisfactory simply to copy section 12 
of the Uniform Sales Act. Accordingly, we proceed to discuss several 
difficulties presented by the American definition, as well as a number of 
related issues arising out of the revision of this branch of sales law. 

2. Definitional Issues 

(a) character of representor 

Section 12 of the Uniform Sales Act only applies to warranties given 
by a seller. While representations by a buyer that induce the seller to 
enter into the contract are no doubt much less common, 13 there is no 
reason why the definition should not apply equally to sellers and buyers. 
We so recommend and our Draft Bill so provides. Section 12 draws no 
distinction between express warranties given by merchants and non-mer- 
chants, and, as already indicated, we support this approach. However, the 
application of a uniform test raises a controversial question with respect 
to the remedies that should be available against a non-merchant seller 
or buyer for breach of express warranty. We examine this issue in a later 
section. 14 

An issue that is not dealt with in section 12 is the liability of a manu- 
facturer or other person in the distributive chain for breach of express 
warranty, where there is no privity of contract between him and the buyer, 
although the warranty was addressed to the buyer. We noted in the War- 
ranties Report, 15 that Anglo-Canadian courts have surmounted this dif- 
ficulty by the concept of a collateral warranty, whereas American courts 
have relied on the hybrid origins of the action in warranty as an action 
on the case in deceit. Whichever rationale is preferred, we think it should 
be made clear that the definition of express warranty applies to repre- 
sentations and promises made by "the seller, manufacturer or distributor 
of the goods", 16 whether or not there is privity of contract between the 

i2See, for example, Oscar Chess Ltd. v. Williams, [1957] 1 All E.R. 325 (C.A.). 

i3Compare, Goldsmith v. Rodger, [1962] 2 Lloyd's Rep. 249 (C.A.). 

14 Infra, this chapter, sec. A. 2(h). 

15 Supra, footnote 3, ch. 5, pp. 65 et seq., and see, also, the important decision of 
Reid, J., in S perry Rand Corp. et al. (a decision of the Ontario High Court of 
Justice, dated January 12, 1979, as yet unreported). 

16 See, Draft Bill, s. 5.10(1). We prefer this formulation to the proposal in the 
New South Wales Working Paper that the definition should be applied to 
representations made by a person who has a "connection in the course of busi- 
ness" with goods of the description to which his representation relates: see 
footnote 10 supra, pp. 287-89, s. 15. Such types of person are broadly defined 
in the proposed New South Wales Draft Bill, s. 4(c) (iv), adding a new s. 5(5) 
to the Sale of Goods Act, 1923. See especially clause (f). 



138 

representor and the representee. We do not deem it necessary to define 
manufacturer, and our Draft Bill contains no definition of this term. The 
underlying theme of the expanded definition is to capture representations 
by persons involved in the distribution of the goods and, in our opinion, 
this should provide sufficient guidance for its application. 

(b) TYPES OF REPRESENTATION 

Section 12 of the Uniform Sales Act applies to any "affirmation of 
fact or any promise". "Affirmation of fact" sounds a little formal, and we 
have a modest preference for "representation", a term that is also used 
in section 36 of the Combines Investigation Act. 11 Accordingly, we recom- 
mend that the definition of express warranty should apply to representations 
or promises relating to goods that are the subject of a contract of sale. 

(c) TIME OF REPRESENTATION 

Section 12 does not address itself directly to the question of the time 
at which the representation must be made. Inferentially, however, the 
representation must be made before, or at the time of, sale; otherwise, the 
buyer would not be able to show that the representation induced him to 
make the purchase. As will be seen, the reliance requirements that we 
propose are different. In our Draft Bill we have, however, retained the 
temporal elements in order not to make the definition too open-ended. 
Admittedly, the restriction of the definition to representations made be- 
fore, or at the time of, sale will exclude post-sale representations. These 
types of case can, however, be treated (as they have been treated in some 
American cases) 18 as modifications of the contract of sale or under 
broader reliance doctrines. 

(d) DEEMED ADOPTION OF REPRESENTATION BY OTHERS 

Our Warranties Report 19 discussed the difficult problem of whether 
a retailer should be deemed to adopt the contents of labelling and other 
descriptive materials attached to or accompanying goods sold but not 
prepared for or by him. We favoured an affirmative answer. We did not, 
however, suggest that the retailer's liability should extend beyond this 
relatively circumscribed area; nor were we addressing ourselves to non- 
consumer warranties. Section 7(2) of Bill 110 would have gone beyond 
our recommendations and would have held the retailer jointly responsible 
with the manufacturer for any written, published or broadcast warranties 
given by a manufacturer. Whatever may be the merits of this rule in the 
context of consumer warranties, we think it too harsh to be applied to 
sellers generally, and do not recommend its adoption in the case of non- 
consumer sales. Indeed, in a later chapter, 20 we recommend in our draft 



HR.S.C. 1970, c. C-23, as amended by S.C. 1974-75-76, c. 76. "Representation" 
is also used in the New South Wales draft section, footnote 16 supra. 

iSSee, for example, Bigelow v. Agway, Inc. (197 '4), 15 U.C.C. Rep. 769. (C.A. 
2); and compare, Hutzler, '"Basis of the Bargain' — What Role Reliance?" 
(1972-73), 34 U. Pitts. L. Rev. 145. 

™ Supra, footnote 3, pp. 34-35. 

20/n/ra, ch. 9, sec. 2. 



139 

provision dealing with the warranty of description 21 that "a description 
of the goods given by a third person is binding on the seller only if by his 
words or conduct he has adopted the provision as his own". 22 This clearly 
militates against the underlying theory of section 7(2) . 

(e) THE RELIANCE FACTOR 

Section 12 of the Uniform Sales Act sets forth, in this context, a 
double test: the buyer must show that "the natural tendency" of the seller's 
representation is to induce the buyer to purchase the goods, and that the 
representation actually induced him to make the purchase. We have no 
quarrel with the first requirement, but the second gives rise to acute dif- 
ficulties when applied to a manufacturer's performance warranty. Fre- 
quently the buyer will not see the warranty until after his purchase, either 
because the warranty document is contained inside the packaging, or be- 
cause the retailer only hands it to him at the time of delivery of the goods. 
Another common example involves goods bought in a self-service store, 
where the buyer does not carefully examine the labelling until he has 
brought the goods home or is ready to use them. In all these cases the 
buyer would have some difficulty in satisfying the second reliance require- 
ment, and the representor may be able to escape responsibility for a 
representation that was clearly intended to be relied upon. We do not think 
that this would be a satisfactory or sensible result. Accordingly, we recom- 
mend that proof of actual reliance by the representee be dispensed with 
where the representation or promise is made to the public. 23 

Several precedents support this distinction. One is section 36 of the 
Combines Investigation Act, 24 which penalizes false or misleading repre- 
sentations made to the public. A second precedent is found in sections 14 
and 15 of the present Sale of Goods Act relating to the implied conditions 
of description and merchantability. In neither case is it necessary for the 
complainant to prove actual reliance on the express or implied representa- 
tion; the reliance is assumed. We note, too, that both Bill HO 25 and the 
Saskatchewan Consumer Products Warranties Act, 1977 26 dispense with 
proof of actual reliance for all types of express warranties, public or pri- 
vate. 

(f ) NEGLIGENCE AS A MATERIAL FACTOR 

In Dick Bentley Productions Ltd. v. Harold Smith (Motors) Ltd., 21 



2iDraft Bill, s. 5.11. 

22 See, however, the qualification to this proposition introduced in our definition 
of the warranty of merchantability, Draft Bill, s. 5.13(1). See also infra, ch. 9, 
sec. 3(b) (vi). 

23 See, Draft Bill, s. 5.10(1) (b). This recommendation would also alleviate the 
difficulties faced by the plaintiffs in Naken et al. v. General Motors of Canada 
and Vauxhall Motors Ltd. (October 12, 1978, Ontario Court of Appeal, as yet 
unreported), reversing (1977), 17 O.R. 193 (Div. Ct.), in being required to 
prove actual reliance on General Motors' advertisements as an essential ingredi- 
ent of their cause of action. 

MSupra, footnote 17. 

ttSupra, footnote 8, ss. 1(1) (c), 7. 

26S.S. 1976-77, c. 15, s. 8(1). 

2 ?[1965] 1 W.L.R. 623 (C.A.), 627. 



140 

Lord Denning, M.R., suggested that negligence, or its absence, could 
make a difference in determining whether a representation that otherwise 
induces detrimental reliance amounts to a warranty. This suggestion has 
been criticized, 28 and rightly so in our opinion, as introducing an extrane- 
ous and novel consideration into the law of warranties. We do not support 
its introduction as an element in the statutory definition of express war- 
ranty. It is well settled 29 that the warranties implied under The Sale of 
Goods Act impose strict liability, and that the seller cannot excuse himself 
by showing that he was ignorant of the defect and could not have dis- 
covered it by the exercise of reasonable care. In our view, serious ano- 
malies would be created if a different test were to be adopted for express 
warranties. 

(g) LANGUAGE OF COMMENDATION 

Section 12 of the Uniform Sales Act™ and UCC 2-313(2) contain 
a proviso to the effect that mere language of commendation shall not be 
construed as a warranty. We did not support this exclusion in the War- 
rarities Report 31 and we do not support it in the wider context of a revised 
Sale of Goods Act. In our view, if a buyer has reasonably relied on the 
accuracy of a representation, it ought surely not to be open to the repre- 
sentor to argue that he was merely exercising a salesman's poetic licence. 
This is the thrust of the decisions 32 on the misleading advertising pro- 
visions in the Combines Investigation Act, and we believe their reasoning 
is just as valid in the civil context. 

(h) MEASURE OF DAMAGES FOR BREACH OF A NON-PROMISSORY 
WARRANTY 

The effect of treating every material representation as an express 
warranty is to expose the representor to the same measure of damages for 
its breach as for breach of any other term of the contract. This means that 
the representor could be liable for expectation and reliance losses, and for 
consequential as well as direct damages. The Commission has considered 
the implications of this change in the case of representations made by a 
private seller, and the possibility of drawing a distinction between com- 
mercial and private sales. 33 In the first case, the normal rule of damages 
would be applied; but, in the case of private sales, the seller's liability 
would only be assessed on a restitutionary or some similar out-of-pocket 
basis, unless the warranty was promissory in character. 

While we are fully conscious of the problem, we have decided not to 



^Benjamin's Sale of Goods (1974), para. 746, p. 333, note 1; New South Wales 
Working Paper, footnote 10 supra, sec. 3.39. 

l^Frost v. Aylesbury Dairy Co. Ltd., [1905] 1 K.B. 608 (C.A.); Buckley v. Lever 
Bros., [1953] O.R. 704, [1953] 4 D.L.R. 16 (H.C.J.). 

30 The proviso to s. 12 of the Uniform Sales Act provides as follows: "No affirm- 
ation of the value of the goods, nor any statement purporting to be a statement 
of the seller's opinion only shall be construed as a warranty." 

^Supra, footnote 3, p. 29. 

3 2 The case law is reviewed in Miniter, "Misleading Advertising: the Standard 
of Deceptiveness" (1976), 1 C.B.LJ. 435. 

33 See, Waddams, footnote 1 supra, pp. 25 et seq. 



141 

recommend adoption of this distinction. It seems to us an elusive test, 
and one that is likely to raise the same difficulties as the present distinc- 
tion between contractual and non-contractual representations. 34 Moreover, 
the concern that the definition of warranty may give rise to extended lia- 
bility in the case of private sales may be unfounded. As our research in- 
dicates, 35 there are few reported cases in which the American courts, basing 
themselves on the expanded definition of warranty in the Uniform Sales 
Act, have awarded consequential damages against a private seller. 

It may be that a different rule of damages should be adopted gener- 
ally in non-commercial sales, and this possibility is explored in chapter 
17 of this Report. In our opinion, however, the distinction should not 
turn on the elusive test of the representor's promissory intentions. 

(i) SHOULD THE EXPANDED DEFINITION OF WARRANTY BE 
APPLIED TO OTHER TYPES OF CONTRACT? 

Our proposals for a new definition of warranty are limited to the 
sales area. We have not considered whether they should be extended to 
other types of contract. The research paper prepared for the Commission 
concludes 36 that this question should be deferred for future consideration. 
The reason given is that other types of contractual transactions, particu- 
larly those involving land, may raise different issues, and that a solution 
apt in the sales field may not always be appropriate in others. The Com- 
mission agrees with this conclusion. 

(j) conclusion: draft provision 

In the light of the above discussion, it may now be appropriate to 
quote the definition of express warranty that we recommend for adop- 
tion in the revised Act: 37 

(1) A representation or promise in any form relating to goods that 
are the subject of a contract of sale made by the seller, manu- 
facturer or distributor of the goods is an express warranty and 
binding upon the person making it 



34Professor Waddams' own example illustrates the difficulty. If a seller advertises 
for sale a painting by A. Y. Jackson it would clearly be held to be a sale by 
description under existing law and the seller would be guilty of breach of a 
condition if the painting were not by A. Y. Jackson. Compare, Beale v. Taylor, 
[1967] 1 W.L.R. 1193 (C.A.). If, however, the original advertisement had 
merely referred to a painting "by a member of the Group of Seven" and if, 
later, in response to an inquiry by the prospective buyer, the seller disclosed 
A.Y. Jackson's name, should the result be any different? If the seller had him- 
self been misled about the identity of the artist, he might find it odd that 
he could be held contractually responsible in the first case, but might have a 
fighting chance in the second. The buyer would be even more mystified by the 
distinction. The difficulty about applying a promissory test that turns on such 
linguistic accidents was pointed out long ago by Williston. See Williston, "Repre- 
sentation and Warranty in Sales — Heilbut v. Buckleton" (1913), 27 Harv. L. 
Rev. 1, 10-12. 

35 We refer here to an unpublished memorandum prepared subsequent to Profes- 
sor Waddams' Working Paper, footnote 1 supra, with respect to the treatment 
of express representations by private sellers under American law. 

36 S«pra, footnote 1, at pp. 71 et seq. 

37See, Draft Bill, s. 5.10. 



142 

(a) if the natural tendency of such representation or promise 
is to induce the buyer, or buyers generally if the repre- 
sentation or promise is made to the public, to rely thereon; 
and 

(b) if, in the case of a representation or promise not made to 
the public, the buyer acts in reliance upon the representa- 
tion or promise. 

(2) Subsection 1 applies to a representation or promise made before 
or at the time the contract was made and whether or not 

(a) it was made fraudulently or negligently; 

(b) there is privity of contract between the person making the 
representation or promise and the buyer; 

(c) it was made with a contractual intention; or 

(d) any consideration was given in respect of it. 

(3) This section applies mutatis mutandis to a representation or 
promise made by the buyer. 

3. Other Issues 

We consider three such issues. The first issue relates to the con- 
tinuation of certain equitable remedies. An apparent conflict between 
decisions of the Supreme Court of Canada and the English Court of Ap- 
peal forms the subject matter of the second issue. The third issue deals 
with the interrelationship of contractual and tortious remedies in the con- 
text of an action for deceit or fraudulent misrepresentation. 

The first issue may be stated in this way: namely, whether the equit- 
able remedies for misrepresentation inducing the making of a contract of 
sale should be abolished in the revised Act. Our opinion is against aboli- 
tion. It may well be that, in future, aggrieved parties may prefer to rely 
exclusively on the superior remedies available under the revised Act for 
breach of warranty, or that the courts, by a process of adaptation, will 
integrate the equitable and statutory remedies. 38 In any event, we do not 
think it necessary, or perhaps wise, to dictate the future of the equitable 
remedies. In saying this we recognize that at least one New Zealand and 
one Australian court 39 have held, contrary to the long established prac- 
tice of English and Canadian courts, that the Sale of Goods Act has already 
excluded the equitable remedies. The supporting reason is that the pro- 
vision equivalent to section 57(1) of the Ontario Act, in preserving the 
general principles of law in their application to contracts of sale, only 
refer to "the rules of the common law". In the leading English case of 
Leaf v. International Galleries* the question whether a buyer can elect 
between his statutory and equitable remedies where the representation 

38Compare, Leaf v. International Galleries, [1950] 2 K.B. 86 (C.A.). 
WRiddiford v. Warren (1901), 20 N.Z.L.R. 572 (C.A.), foll'd in Watt v. West- 

hoven, [1933] V.L.R. 458; Benjamin, footnote 11, supra, para. 737. 
^ Supra, footnote 38. 



143 

amounts to a term of the contract, was not discussed. This question has, 
however, now been answered in the representee's favour in section 1(a) of 
the U.K. Misrepresentation Act 1967. 41 We consider below, 42 in a wider 
context, whether a similar provision should be inserted in the revised Sale 
of Goods Act. 

The second question is whether the Act should resolve the apparent 
conflict between the decision of the Supreme Court of Canada in /. Nunes 
Diamonds Ltd. v. Dominion Electric Protection Co. 42 and the decision of 
the English Court of Appeal in Esso Petroleum Ltd. v. Mar don. 44 In the 
former case, according to one reading of the majority judgment, the Court 
adopted the proposition that, where there is a contract between the parties, 
an action cannot be brought in tort for negligent representation arising 
out of the same set of facts. The converse was held by the English Court 
of Appeal in the Mardon case. It may be that /. Nunes Diamonds can be 
distinguished on its facts 45 but, whether this is so or not, we find the reason- 
ing in the Mardon case more persuasive. We know of no sound reason in 
policy why the existence of a contract should preclude an aggrieved party 
from pursuing any extra-contractual remedies the law may confer upon 
him independently of the contract, unless the contract itself so provides. 
Nor do we think that a distinction can, or should, be drawn between an 
action for negligent representations inducing the formation of a contract, 
and other types of tort. However, we do not believe it necessary for the re- 
vised Act to refer specifically to claims in negligence under the Hedley 
Byrne rule. 46 We recommend instead a broader expression of principle to 
the following effect: 

The rights of action of an aggrieved party arising otherwise than in 
contract are not affected by the existence of a contract of sale unless 
the contract itself so provides. 47 

The third issue is still more controversial. It involves the question 
whether, in an action for deceit or fraudulent misrepresentation arising out 
of a contract of sale, the plaintiff should be able to meld his contractual 



41 1967, c. 7. Section 1 provides: 

Where a person has entered into a contract after a misrepresentation has 
been made to him, and — 

(a) the misrepresentation has become a term of the contract; or 

(b) the contract has been performed; 

or both, then, if otherwise he would be entitled to rescind the contract with- 
out alleging fraud, he shall be so entitled, subject to the provisions of this 
Act, notwithstanding the matters mentioned in paragraphs (a) and (b) of 
this section. 
42/n/ra, pp. 144-45. 
43[1972] S.C.R. 769. 

44[1976] Q.B. 801, [1976] 2 All E.R. 5 (C.A.), discussed in Ziegel, "Com- 
mentary", (1976), 1 C.B.LJ. 259. See, also, Batty v. Metropolitan Property 
Realizations Ltd., [1978] 2 W.L.R. 500, [1978] 2 All E.R. 445 (C.A.). 
45It was so distinguished in Sodd Corp. Inc. v. Tessis (1977), 17 O.R. (2d) 158, 
79 D.L.R. (3d) 632 (C.A.); and see, also, Ronald Elwyn Lister Ltd. v. Dunlop 
Canada Ltd. (1978), 19 O.R. (2d) 380 (H.C.J.), and, generally, Schwartz, 
"Hedley Byrne and Pre-Contractual Misrepresentations: Tort Law to the Aid 
of Contract" (1978), 10 Ottawa L. Rev. 581. 
* 6 Supra, footnote 4. 
47See, Draft Bill, s. 9.20(1). 



144 

and tortious remedies, and thus recover any expectation or "loss of bar- 
gain" damages appropriate to a claim for breach of warranty that he may 
have suffered. Alternatively, should the plaintiff be put to his election and 
be permitted to recover only his out of pocket losses if he elects to sue in 
tort? The latter rule represents the existing Anglo-Canadian law. 48 A 
majority of the American state courts that have considered the question 
permit recovery of loss of bargain damages. 49 The Anglo-Canadian rule 
is based on the normal principle that the purpose of the law of tort is to 
compensate the plaintiff for losses sustained, and not to give him the 
benefit of a contractual bargain. The reasoning supporting the majority 
American position has been persuasively argued in the following passage: 50 

The plaintiff thought he was entering a transaction which would gain 
for him certain economic advantages. This is the very function of a 
contract. His belief, and the action taken pursuant thereto, were jus- 
tifiable. He has failed to obtain the advantage, the expectation of 
which induced him to enter the transaction. If he has dealt with the 
defendant as the other party to a contract, the amount of his re- 
covery should not depend upon whether he or his lawyer calls the 
action one 'in contract' or 'in tort'. Whether for breach of warranty 
or deceit or in any other form of action, if he demands it, it would 
seem good policy that he recover the value of the reasonable ex- 
pectation which he has failed to obtain. 

Article 2 has swung its support in favour of the majority rule. Sec- 
tion 2-721 provides: 

Remedies for material misrepresentation or fraud include all remedies 
available under this Article for non-fraudulent breach. Neither re- 
scission or a claim for rescission of the contract for sale nor rejection 
or return of the goods shall bar or be deemed inconsistent with a 
claim for damages or other remedy. 

We find the American rule much more persuasive than the accepted Anglo- 
Canadian rule and, accordingly, we recommend its adoption in the re- 
vised Ontario Act. Our Draft Bill so provides. 51 

The second sentence of UCC 2-721 addresses itself to a related 
question arising out of doctrines of election. This section makes it clear 
that a plaintiff who exercises a right of rescission, whether on grounds of 
fraudulent or innocent misrepresentation or otherwise, is not deemed to 
waive his right to contractual damages. As will be seen in a later chapter, 52 
the American pre-Code rules on rights of rescission for breach of express 
or implied warranties were not the same as the Anglo-Canadian rules. It is 
fair to say, however, that in both jurisdictions rescission is an ambivalent 

4&Doyle v. Olby (Ironmongers) Ltd., [1969] 2 Q.B. 158 (C.A.); Parna v. G. & S. 

Properties Ltd., [1969] 2 O.R. 346, 5 D.L.R. (3d) 315 (C.A.); McGregor on 

Damages (13th ed., 1972), paras. 908-09. 
49Prosser, The Law of Torts (4th ed., 1971), p. 734; Annot, (1940), 124 

A.L.R. 37; Selman v. Shirley (1938), 85 P. 2d 384. 
SOHarper & McNeely, "A Synthesis of the Law of Misrepresentation" (1937-38), 

22 Minn. L. Rev. 939, 964. 
SiDraft Bill, s. 9.20(2). 
SVnfra, ch. 17, sec. C. 1(b). 



145 

term that has been a fertile source of confusion. We find the second sen- 
tence a useful provision and also recommend adoption of a similar provi- 
sion in the revised Act. 53 

B. CLASSIFICATION OF CONTRACTUAL OBLIGATIONS 

A distinctive feature of the present Sale of Goods Act is its division 
of contractual obligations into conditions and warranties. "Condition", a 
notoriously ambiguous term, 54 is used in several senses in the Act, but is 
not defined anywhere. "Warranty", which is also a term with multiple 
meanings, is defined in section l(l)(n) as "an agreement with reference 
to goods that are the subject of a contract of sale but collateral to the main 
purpose of the contract, the breach of which gives rise to a claim for 
damages but not to a right to reject the goods and treat the contract as 
repudiated". The distinction, then, between a warranty and a condition is 
that breach of a warranty only gives rise to a claim in damages, whereas 
breach of a condition, as emerges from section 12(2) and other parts of 
the Act, 55 entitles the aggrieved party to rescind the contract and to claim 
damages, or to do either. 56 

This dichotomous classification of obligations into warranties and 
conditions appears to have its origins in the attempts by Lord Mansfield in 
the late 1 8th century 57 to mitigate the rigours of the law of covenants. In 
this evolution, the right of an aggrieved party to treat the contract as at an 
end was restricted to circumstances where the breach by the other involved 
a "dependent" covenant and the breach was fundamental in nature. These 
developments merely mirrored a problem with which all legal systems 
must come to grips: namely, the remedies to be afforded for different 
breaches of contract. There was, however, a peculiarity about English 
sales law, as it developed during the 19th century. 58 Having once cate- 
gorized a term as amounting to a condition or warranty for the purposes 
of one contract, the classification was then adopted as binding in later cases 
involving other contracts of sale and without regard to the severity of the 
breach in the individual case. This was particularly true of the great terms 
of title, description, merchantability and fitness, imported in the buyer's 
favour, and later reproduced in sections 12 to 15 of the U.K. Act. 

While there may be some terms whose breach will so seriously pre- 
judice the other party's position that they may fairly be treated as es- 



53See, Draft Bill, s. 9.20(3). 

54Benjamin, footnote 11 supra, paras. 753 et seq.\ Stoljar, "The Contractual Con- 
cept of Condition" (1953), 69 L.Q.R. 485. The various meanings of the term 
are also discussed in L. Schuler A.G. v. Wickman Machine Tool Sales Ltd., 
[1974] A.C. 235, [1973] 2 W.L.R. 638 (H.L.). 

55 For example, ss. 29, 30, 51. 

56 Note, however, the restriction imposed by s. 12(3) on the right to reject in the 
case of a sale of specific goods. 

57In Boone v. Eyre (1777), 1 H.B1. 273a, 126 E.R. 160 (C. Pleas). See, gener- 
ally, Hong Kong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd., [1962] 
2 Q.B. 26 (C.A.), 65-73; and compare Cehave N.V. v. Bremer Handelsgesell- 
schaft m.b.H., [1976] 1 Q.B. 44 (C.A.), per Denning, M.R., at pp. 57-59. 

58Compare, Devlin, "The Treatment of Breach of Contract", [1966] Camb. L.J. 
192, especially at pp. 196-97. 



146 

sential terms, this is more likely to be the exception than the rule. As 
Lord Justice Diplock pointed out in a leading case: 59 

There are, however, many contractual undertakings of a more com- 
plex character which cannot be categorised as being 'conditions' or 
'warranties', if the late nineteenth-century meaning adopted in the 
Sale of Goods Act, 1893 ... be given to those terms. Of such under- 
takings all that can be predicated is that some breaches will and 
others will not give rise to an event which will deprive the party not 
in default of substantially the whole benefit which it was intended 
that he should obtain from the contract; and the legal consequences 
of a breach of such an undertaking, unless provided for expressly in 
the contract, depend upon the nature of the event to which the 
breach gives rise and do not follow automatically from a prior 
classification of the undertaking as a 'condition' or a 'warranty'. 

The case did not involve a contract for the sale of goods, but these obser- 
vations seem just as relevant in a sales context. 

The a priori classification of contractual terms in The Sale of Goods 
Act has come under increasing criticism. 60 The reason for this criticism is 
the arbitrary results to which such a classification may give rise, and the 
encouragement it provides for contrived excuses by a contracting party 
who wants to relieve himself of a bargain that he no longer finds profitable. 
It has meant, for example, that a buyer may reject an expensive machine 
because of a broken glass dial costing only a few cents to replace, 61 or 
that he may refuse a large shipment of staves because of minor and incon- 
sequential deviations from the contractual description. 62 The distinction is 
not generally or consistently adopted in other branches of contract law and 
it was not adopted in the Uniform Sales Act, nor, subsequently, by the 
draftsmen of the Uniform Commercial Code. 63 Nor does it appear in the 
Hague Uniform Law on Sales or the draft sales Convention prepared by 
UNCITRAL. Recent English decisions also indicate a judicial willingness 
to erode what had been regarded previously as an impregnable scheme of 
classification. In Cehave N.V. v. Bremer Handelsgesellschaft m.b.H., 64 

59 Hong Kong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd., footnote 57 
supra, at p. 70. 

60 Compare, the Ontario Law Reform Commission's Report on Consumer War- 
ranties and Guarantees in the Sale of Goods (1972), p. 31 and New South 
Wales Working Paper, footnote 10 supra, Part 3. See also Waddams, The Law 
of Contracts (1977), pp. 364-66. 

61/.B.M. v. Shcherban, [1925] 1 D.L.R. 864 (Sask. C.A.). 

62-Arcos Ltd. v. Ronaasen, [1933] A.C. 470 (H.L.). A system of a priori classi- 
fication may also result in a court denying any remedy where the Act charac- 
terizes the term as a condition and the court deems it oppressive to allow the 
buyer to reject the goods for minor defects. Damages would be an adequate 
remedy in such a case, but our Act does not vest any discretion in the Court in 
determining whether or not a right to reject should be allowed once breach of 
a condition has been established and the buyer purports to reject. Lord Den- 
ning's judgment in the Cehave case, footnote 57 supra, shows clear awareness 
of this dilemma. 

63 This is not to suggest that the approach adopted in these laws was or is en- 
tirely satisfactory: see infra, chapters 16 and 17. 

64 [1976] Q.B. 44 (C.A.), followed in Tradax International S.A. v. Goldschmidt, 
[1977] 2 Lloyd's Rep. 604 (Q.B. Com. Ct.). 



147 

the English Court of Appeal held that the Sale of Goods Act did not re- 
quire the a priori classification of express terms of a contract of sale. In a 
later decision, Reardon Smith Line Ltd. v. Hansen-Tangen ("The Diana 
Prosperity"), 65 Lord Wilberforce, whose judgment was concurred in by 
Lord Simon of Glaisdale and Lord Kilbrandon, expressed his dissatisfac- 
tion 66 with earlier cases involving the construction of the implied condi- 
tion of description. 

Even before these trends had emerged, we recommended, in our 
Report on Consumer Warranties and Guarantees, 61 the abolition of the 
distinction between warranties and conditions in consumer sales and the 
substitution of a single term "warranty" to describe the seller's obligations 
with respect to the attributes of the goods. We also recommended the 
adoption of a new regime of remedies for breach of warranty obligations 
that would turn on the gravity of the breach and not on an a priori classi- 
fication of the term breached. The New South Wales Working Paper has, 
since then, adopted a similar set of recommendations with respect to both 
non-consumer and consumer sales. 68 

We have again reviewed the position and we are satisfied that our 
earlier recommendations are as appropriate for general contracts of sale 
as they are for consumer sales. However, since our earlier recommenda- 
tions were restricted to consumer warranties, they need to be adapted to 
meet the broader requirements of the revised Act. We therefore make two 
recommendations, which are incorporated in our Draft Bill. First, we 
recommend the elimination of the distinction between warranties and 
conditions in the revised Act and the substitution of the single term, 
"warranty", to describe express or implied terms relating to goods. Sec- 
ondly, we recommend the adoption of a unitary concept of substantial 
breach to determine the remedies available for breach of contract by the 
buyer or seller and, in particular, to determine when an aggrieved party 
may cancel the contract because of breach by the other. We discuss in 
chapter 18 our recommended definition of substantial breach. 

These recommendations will have their primary impact on the buyer's 
remedies, because the present Act only adopts a system of a priori classi- 
fication with respect to the seller's implied obligations as to title, descrip- 
tion, merchantability, fitness, and conformity to sample in cases of sale 
by sample. 69 So far as their effect on express obligations is concerned, our 
recommendations have already been foreshadowed by the recent English 
decisions mentioned above, 70 certainly with respect to the seller's obliga- 
tions and probably also with respect to the buyer's obligations. 

The impact of our recommendations on stipulations as to time is a 
little more speculative, because the existing rules themselves are complex 



65[1976] 2 Lloyd's Rep. 621 (H.L.). 

Mlbid., at pp. 626-27. 

61 Supra, footnote 3, p. 44. 

6 %Supra, footnote 10, Part 3, especially paras. 3.21, 3.44. 

&The Sale of Goods Act, ss. 13-15; and see, also, s. 29(1) with respect to the 

seller's obligations as to quantity. Buyer's remedies are dealt with in ch. 17. 
7°Supra, footnotes 64, 65. 



148 

and not always clear. 71 Under existing law, breach of a time stipulation 
in a contract of sale, where time is "of the essence", is breach of a condi- 
tion, and entitles the aggrieved party to treat the contract as at an end. 
Section 11 of the Ontario Sale of Goods Act provides as follows: 

11. Unless a different intention appears from the terms of the 
contract, stipulations as to time of payment are not of the essence 
of a contract of sale, and whether any other stipulation as to time 
is of the essence of the contract or not depends on the terms of the 
contract. 

As McCardie, J., observed in an oft-cited passage in Hartley v. Hymans, 11 
section 11 does not adequately reflect existing law, since in commercial 
contracts the well established common law rule (as retained by section 57 
of the Ontario Act) long has been that time is prima facie of the essence 
with respect to delivery. Moreover, the presumption in the section that 
stipulations as to time of payment are not of the essence, while amply sup- 
ported by authority, 73 may also be too broad. It is difficult to reconcile 
with the rule in section 27 of the Act that delivery and payment are con- 
current conditions of the contract of sale, and with the seller's entitlement, 
pursuant to section 48, to recover loss of bargain damage where the 
buyer refuses or neglects to accept "and pay" for the goods. 74 The status 
of the buyer's obligation to take delivery of the goods where the seller is 
not to ship them is also unsettled. Section 36 of The Sale of Goods Act 15 
leaves the inference that time in such cases is not of the essence. However, 
decisions on this point 76 fall on both sides of the line and, unless the goods 
have been paid for and the seller is merely acting as an involuntary bailee, 
it is not easy to explain why the buyer's failure to take delivery should be 
treated more leniently than the seller's failure to make timely delivery. 

From this inadequate summary it will be seen that, while existing 
case law treats some stipulations as to time as prima facie essential terms 
of the contract, there remains a substantial area where there is no pre- 
sumption with respect to the gravity of a breach or where the position is 



71 Compare, Stoljar, "Untimely Performance in the Law of Contract" (1955), 71 

L.Q. Rev. 527, especially pp. 531 et seq. 
72[1920] 3 K.B. 475, at 483-84. See, also, Warinco v. Samor, [1977] 2 Lloyd's 

Rep. 582, 590. 
73For example, Martindale v. Smith (1841), 1 Q.B. 389; Decro-Wall Interna- 
tional, S.A. v. Practitioners in Marketing Ltd., [1971] 1 W.L.R. 361 (C.A.); 
and compare, Financings Ltd. v. Baldock, [1963] 2 Q.B. 104 (C.A.). 
74Compare, Stoljar, footnote 71 supra, at p. 539; and see, also, Mooney v. Lipka, 

[1926] 4 D.L.R. 647 (Sask. C.A.). 
75 Section 36 provides as follows: 

36. When the seller is ready and willing to deliver the goods and requests 

the buyer to take delivery and the buyer does not within a reasonable time 

after such request take delivery of the goods, he is liable to the seller for 

any loss occasioned by his neglect or refusal to take delivery, and also for 

a reasonable charge for the care and custody of the goods, but nothing in 

this section affects the rights of the seller where the neglect or refusal of 

the buyer to take delivery amounts to a repudiation of the contract. 

76For example, Woolfe v. Horn (1877), 2 Q.B.D. 355; Sharpe v. Christmas 

(1892), 8 T.L.R. 687 (C.A.); Kidston v. Monceau Iron Works Co. Ltd. 

(1902), 7 Com. Cas. 82; Mooney v. Lipka, footnote 74 supra; and compare 

Atiyah, The Sale of Goods (5th ed., 1975), pp. 139-40. 



149 

unsettled. Our recommendation in favour of a uniform test of substantial 
breach would not, in our view, change the position significantly. We would 
expect the practical results to be the same in most cases, although the 
reasoning would differ. There would be greater emphasis on the facts of 
individual cases and the actual prejudice suffered by the aggrieved party, 
and less reliance on a priori assumptions. We would regard such flexibility 
as a desirable feature of the revised Act. 

The difficulty of a priori characterization of stipulations with respect 
to time may be illustrated in the context of the common law rule that time 
of delivery is prima facie of the essence in mercantile contracts. The rea- 
son given for the rule 77 is that the purchase may be a link in a chain of 
transactions, and that, if the seller does not honour his performance date, 
the buyer will be in breach of his obligations to his own sub-buyer. This 
reasoning may be quite valid where the goods are intended for resale, al- 
though even in such cases it may be thought that the importance of strict- 
ly punctual performance will vary with the nature of the goods, the char- 
acter of the parties, and the market in which they trade. 78 Leaving aside 
this not unimportant qualification, the reasoning clearly does not apply 
where the goods are bought for use and not for resale. Again, if the test 
is one of relative prejudice to the parties, 79 where the goods are made to 
the buyer's specifications and there is no other ready market for them, 
the loss faced by the defaulting seller if cancellation is permitted for any 
delay in delivery, however short, is likely to be much greater than the 
damage suffered by the buyer. It must be clear, therefore, that the treat- 
ment of time stipulations, even in mercantile contracts, admits of no simple 
generalization. 80 

However, it would be wrong to conclude, in the context of time 
stipulations, that our recommendation that a system of a priori classifica- 
tion should not be applied, will leave the parties adrift in a sea of un- 
certainty. First, in the great majority of cases, the parties should have no 



VHalsbury's Laws of England, (3rd ed., 1960), Vol. 34, para. 71, pp. 45-46. 
78 Compare, Williston on Sales (Rev. ed., 1948), sec. 453a; and Cor bin on 
Contracts, Vol. 3 A, sec. 718, which provides as follows: 

718. It can not truthfully be said that, in contracts for the sale of goods, 
or in 'contracts of merchants', time is always of the essence. Here, as 
elsewhere, the parties can make it so by the use of express words; but, if 
they do not, then it depends on circumstances. 'Merchants' make all sorts 
of contracts for all sorts of purposes. 'Goods' of many kinds are bought 
and sold for many purposes. If delivery or payment is promised at a 
specified date, a later delivery or payment is a breach of duty; but whether 
the lateness is such as to justify the other party in not paying or delivering 
depends on circumstances. 
^Compare, Corbin, footnote 78 supra, sec. 719, and Paton & Sons v. Payne & 

Co. (1897), 35 Sc. L.R. 112 (H.L.). 
80 This is recognized in the cautious wording of the Restatement of the Law of 
Contracts, sec. 276(b), which provides as follows: 

In determining the materiality of delay in performance, the following rules 
are applicable: 

(b) In mercantile contracts performance at the time agreed upon is im- 
portant, and if the delay of one party is considerable having ref- 
erence to the nature of the transaction and the seriousness of the 
consequences, and is not justified by the conduct of the other party, 
the duty of the latter is discharged. 



150 

difficulty in ascertaining whether a court is likely to treat a particular 
breach as to time as amounting to a substantial or a minor breach. Sec- 
ondly, the parties will continue to be free to make time of the essence, or 
to adopt such other provisions with respect to the characterization of 
terms or the remedies for breach as they see fit, so long as they do not 
violate the basic norms of conscionability and good faith discussed later 
in this Report 81 and recommended for adoption in the revised Act. Thirdly, 
as will be discussed more fully hereafter, 82 we also recommend the adop- 
tion of provisions entitling an aggrieved buyer or seller to treat a delay in 
making or taking delivery, or in payment, as amounting to a substantial 
breach where the party in breach has failed to perform within a reason- 
able time after being requested to do so. 

RECOMMENDATIONS 

The Commission makes the following recommendations: 

1. The revised Act should adopt the definition of express warranty 
contained in section 12 of the American Uniform Sales Act, sub- 
ject to the following modifications and observations: 

(a) The definition should apply to representations or promises 
made by buyers as well as sellers, and should include repre- 
sentations or promises made by "the seller, manufacturer 
or distributor of the goods", whether or not there is privity 
of contract between the representor and representee. 

(b) The definition should apply to representations or promises 
relating to goods that are the subject of a contract of sale, 
and that are made before, or at the time of, the contract of 
sale. 

(c) There should be no general presumption that a seller is 
deemed to adopt the representations or promises made by 
a third party in relation to the goods in non-consumer sales. 

(d) The natural tendency of such representations or promises 
must be to induce the buyer, or buyers generally if the 
representation or promise is made to the public, to purchase 
the goods, but no proof of actual reliance should be required 
where the representation or promise is made to the public. 

(e) Negligence should not be a material factor in determining 
whether a representation amounts to a warranty; nor should 
language of commendation be excluded from the definition 
of express warranty if it otherwise satisfies the reliance 
requirement. 

(f) No distinction should be made between commercial and 
private sales in respect of the measure of damages for breach 
of a non-promissory warranty, but this recommendation is 
without prejudice to a review at some later date of the 
damage rules applicable to private sales of goods. 



81 Infra, ch. 7. 

% 2 Infra, chapters 16, 17. 



151 

(g) The Commission makes no recommendation at the present 
time with respect to any extension of the definition of ex- 
press warranty beyond the area of sale of goods. 

2. The equitable remedies for misrepresentation inducing the making 
of a contract of sale should not be abolished. Nor should the 
representee be precluded from pursuing any other non-con- 
tractual causes of action arising out of the representation. Ac- 
cordingly, the revised Act should provide that the rights of action 
of an aggrieved party, arising otherwise than in contract, are 
not affected by the existence of a contract of sale, except insofar 
as the contract itself so provides. 

3. In an action for fraudulent misrepresentation inducing the forma- 
tion of a contract of sale, the plaintiff should be entitled to in- 
voke his remedies under the revised Act for breach of warranty, 
as well as his non-contractual remedies. The plaintiff should not 
be put to his election. 

4. To resolve ambiguities in the use of the term "rescission", the 
revised Act should make it clear, following the second sentence 
of UCC 2-721, that rescission or a claim for rescission of the 
contract of sale or rejection or return of the goods, shall not bar 
or of itself preclude a claim for damages or other remedy. 

5. The revised Act should eliminate the distinction between warranty 
and condition and, where appropriate, substitute the single term 
"warranty". 

6. In order to determine the remedies available to an aggrieved 
buyer or seller and when he may cancel the contract because of 
breach by the other, the revised Act should adopt a unitary 
concept of substantial breach in place of the existing classification 
of warranties and conditions. 



CHAPTER 7 



FREEDOM OF CONTRACT AND MINIMUM 
BEHAVIOURAL STANDARDS: THE DOCTRINES 
OF UNCONSCIONABILITY AND GOOD FAITH IN 
PERFORMANCE AND ENFORCEMENT 



A. THE DOCTRINE OF UNCONSCIONABILITY 

1. The General Issue 

The right to bargain to one's best advantage is inherent in the very 
concept of contract, and is recognized in section 53 of the Ontario Sale of 
Goods Act. All civilized legal systems, however, have long recognized the 
need to balance freedom of contract with the need to protect the weaker 
party against over-reaching by the stronger party. 1 The challenge that con- 
fronted the draftsmen of Article 2 of the Uniform Commercial Code was 
whether their constituents were ready to confer a generalized power upon 
the courts to grant relief from unconscionable bargains, such as is now con- 
tained in the celebrated section 2-302. Predictably, their earliest efforts 
provoked great controversy. The provision was substantially altered in 
later drafts, 2 and the current version of section 2-302 emerged in the 
Official Text adopted by the sponsoring organizations in 1952. It reads 
as follows: 

(1) If the court as a matter of law finds the contract or any clause 
of the contract to have been unconscionable at the time it was 
made the court may refuse to enforce the contract, or it may 
enforce the remainder of the contract without the unconscionable 
clause, or it may so limit the application of any unconscionable 
clause as to avoid any unconscionable result. 

(2) When it is claimed or appears to the court that the contract or 
any clause thereof may be unconscionable the parties shall be 
afforded a reasonable opportunity to present evidence as to its 
commercial setting, purpose and effect to aid the court in making 
the determination. 

The Code's doctrine of unconscionability and its subsequent handling 
by the courts have attracted an immense amount of learned comment. 3 
However, the initial excitement generated by the appearance of this radical 
departure from accepted contract learning has subsided. Subsequent legis- 
lative and judicial developments have fully vindicated the judgment of two 

JFor a general discussion of the doctrine of unconscionability, see Trebilcock, 
"Fair Exchange of Values in Sales Transactions: the Doctrine of Unconscion- 
ability", Research Paper No. III.4; and Waddams, "Unconscionability in Con- 
tracts" (1976), 39 Mod. L.R. 369. 

2 See, Trebilcock, supra, pp. 30-32. 

3 See, among others: Note, "The Doctrine of Unconscionability" (1967), 19 
Maine L. Rev. 81; Harrington, "Unconscionability under the Uniform Com- 
mercial Code" (1968), 10 South Texas L. J. 203; Spanogle, "Analyzing Uncon- 
scionability Problems" (1969), 117 U. Pa. L. Rev. 931; Younger, "Judge's View 
of Unconscionability" (1973), 5 U.C.C. L.J. 348; Duesenberg, "Practioner's 
View of Contract Unconscionability" (1976), 8 U.C.C. L.J. 237. 

[153] 



154 

American authors 4 that the section embodied an idea whose time had 
arrived. We share this view and, subject to the more detailed comments 
offered below, recommend the adoption of an unconscionability provision 
in the revised Ontario Act. 

It was a firmly held dogma of late 19th century English contract law, 
that the law should not be a mender of improvident bargains freely entered 
into, and that the overriding duty of the courts was to respect the autonomy 
of the parties' will. 5 This abstentionist view of the judicial role mirrored 
the prevailing influence of the economic doctrine of laissez-faire. This 
doctrine held that free choice in the marketplace and the self-interest of 
individuals would ensure that the proper contractual balance would be 
struck and abuses avoided. 

This idealized view of the operations of the marketplace never fully 
corresponded with practice. A comparative glance at the experience of 
other legal systems, 6 not to mention the long history of equity's interven- 
tion with respect to mortgage loans, penalties and forfeitures, might have 
mellowed some of the Victorian optimism. The experience following the 
repeal of the usury acts, and the necessity to re-introduce money lending 
controls to curb abuses, must also have given pause for reflection. The 
utilitarian concept became increasingly anachronistic as standard form 
contracts replaced individually negotiated terms, and powerful corpora- 
tions, with the ability and willingness to impose unilateral terms, displaced 
the small entrepreneur and skilled artisan of an earlier day. 

Neither the courts nor the legislatures were oblivious to the changing 
character of the marketplace. Consumer protection legislation in the credit 
and sales areas emerged in Ontario even before the turn of the century, 
and has been sustained since at an increasing tempo. For a long time, 
however, judicial reaction to unconscionable bargaining behaviour took a 
more covert form. Unfair clauses were rarely policed explicitly in the name 
of a minimum behavioural baseline; but the same ends were often reached 
by a "strict" construction of agreements and a willingness to find evidence 
of fraud and other forms of impeachable conduct. Examples of this process 
of judicial emasculation of traditional contract doctrines in the field of dis- 
claimer clauses are legion, and were discussed in the Commission's Report 
on Consumer Warranties. 1 In recent years, the Anglo-Canadian courts 
have begun to discard these more oblique means for a more explicit 
policing role. The equitable doctrine of constructive fraud has been infused 
with a new lease on life to restrain the exploitation of a manifestly weaker 



4 White & Summers, Handbook of the Law Under the Uniform Commercial 
Code (1972), p. 115. 

5 See, for example, Printing and Numerical Registering Co. v. Sampson (1875), 
L.R. 19 Eq. 462, per Jessel, M.R., at p. 465, cited in Cheshire and Fifoot, The 
Law of Contract (7th ed., 1969), p. 21. 

6 Notably the provisions in sections 138 and 242 of the German Civil Code. 

7 Ontario Law Reform Commission, Report on Consumer Warranties and Guar- 
antees in the Sale of Goods (1972), pp. 50-53. 



155 

party. 8 Still more striking are some of the judicial utterances in such recent 
decisions as Clifford Davis Management Ltd. v. WE A Records Ltd., 9 
Lloyds Bank Ltd. v. Bundy, 10 and Schroeder Music Publishing Co. Ltd. v. 
Macaulay, 11 favouring a broad doctrine of unconscion ability. Whether 
these cases involve a basic reversal of the earlier abstentionist philosophy 
remains to be seen. If they do, and assuming the Canadian courts follow 
suit, 12 they will only be mirroring the celebrated shift in American judicial 
philosophy represented by the New Jersey Supreme Court's decision in 
1960 in Henningsen v. Bloomfield Motors, Inc. 13 

Further vindication for the Code's philosophy will be found in the 
recent adoption in Ontario of The Business Practices Act, 1974 14 and the 
emergence of parallel legislation in Alberta, British Columbia and other 
provinces. 15 In all of these, as in the earlier Unconscionable Transactions 
Relief statutes, 16 unconscionable agreements are subjected to a regime of 
judicial or administrative surveillance, or both. An equally important 
source of precedent is provided by section 4 of the U.K. Supply of Goods 
(Implied Terms) Act 1973, 11 now superseded in this respect by the Unfair 
Contract Terms Act 1977. 1S These precedents are particularly significant 
because, unlike the Business Practices legislation, their provisions are not 
restricted to consumer sales. The same is true of the Uniform Land Trans- 



8 Trebilcock, footnote 1, supra, pp. 22 et seq. Some representative Canadian 
cases are: Morrison v. Coast Finance Ltd. (1965), 55 D.L.R. (2d) 710 
(B.C.C.A.); Knupp v. Bell (1966), 58 D.L.R. (2d) 466 (Sask. Q.B.), affd 67 
D.L.R. (2d) 256 (Sask. C.A.); Marshall v. Canada Permanent Trust Co. 
(1968), 69 D.L.R. (2d) 260 (Alta. S.C.); Straiton v. Straiton (1972), 30 
D.L.R. (3d) 102 (B.C. S.C.); Paris v. Machnik (1973), 32 D.L.R. (3d) 723 
(N.S. S.C.); Black v. Wilcox (1976), 12 O.R. (2d) 759 (C.A.). See also the 
Comment by Bradley Crawford in (1966), 44 Can. Bar Rev. 142. 
9[1975] 1 W.L.R. 61, [1975] 1 All E.R. 237 (C.A.). 

iO[1975] Q.B. 326, [1974] 3 All E.R. 757 (C.A.), followed in McKenzie v. 
Bank of Montreal (1975), 7 O.R. (2d) 521, 55 D.L.R. (3d) 641 (Ont. 
H.C.J.), affd (1976) 12 O.R. 719 (C.A.), and distinguished on the facts in 
Royal Bank of Canada v. Girgulis, [1977] 6 W.W.R. 439 (Sask. Q.B.). 

H[1974] 3 All E.R. 616 (H.L.), aff'g [1974] 1 All E.R. 171. 

12 See, footnote 10 supra. And see, also, Tilden Rent-A-Car Co. v. Clendenning 
(1978), 18 O.R. (2d) 601 (C.A.). 

1 3(1960), 161 A. 2d 69. In this case, which was decided on common law 
principles, the Court struck down a clause in a standard form contract that 
limited the liability of the manufacturer and seller of a motor vehicle as being 
contrary to public policy. 

14S.O. 1974, c. 131. 

15 See, for example, The Unfair Trade Practices Act, S.A. 1975, c. 33; and the 
Trade Practices Act, S.B.C. 1974, c. 96 as am. 

16 For Ontario, see R.S.O. 1970, c. 472. Most of the other common law provinces 
have adopted almost identical legislation. 

171973, c. 13 (U.K.). 

181977, c. 50, s. 6 (U.K.). See, also, Thompson, Unfair Contract Terms Act 
1977. 



156 

actions Act 19 which, in section 1-311, has adopted an enlarged version of 
UCC 2-302. 20 

In the light of these developments there seems little profit in pursuing 
further the merits of an unconscionability doctrine: the doctrine is rapidly 
becoming, if indeed it has not already become, a thoroughly respectable 
landmark in the modern law of sales. 21 It will be more rewarding to con- 
sider a number of important subsidiary questions, which need to be 
answered once the decision of principle has been taken. 

2. Specific Questions 

(a) should the doctrine be confined to consumer sales? 

It may be thought that, since Ontario has already enacted legislation 
to protect consumers against unconscionable bargains, there is no need for 
an additional unconscionability provision in the revised Sale of Goods Act. 
In our opinion, this conclusion is not warranted. It is true that the majority 
of abuses occur in the consumer field, but it is not correct to assume that 
they occur only in this area. The rich Anglo-Canadian jurisprudence shows 
that small or inexperienced entrepreneurs can be hurt just as badly by one- 
sided and harsh bargains as the average consumer. 22 The Code's draftsmen 



!9See, supra, ch. 2, text to footnote 109. 
20 Section 1-311 provides: 

(a) The court, upon finding as a matter of law that a contract or contract 
clause was unconscionable at the time the contract was made, may 
refuse to enforce the contract, enforce the remainder of the contract 
without the unconscionable clause, or limit the application of any 
unconscionable clause in order to avoid an unconscionable result. 

(b) Whenever it is claimed, or appears to the court, that a contract or any 
contract clause is or may be unconscionable, the parties, in order to 
aid the court in making the determination, shall be afforded a reason- 
able opportunity to present evidence as to: 

( 1 ) the commercial setting of the negotiations; 

(2) whether a party has knowingly taken advantage of the in- 
ability of the other party reasonably to protect his interests 
by reason of physical or mental infirmity, illiteracy, or inabili- 
ty to understand the language of the agreement, or similar 
factors; 

(3) the effect and purpose of the contract or clause; and 

(4) if a sale, any gross disparity, at the time of contracting, 
between the amount charged for the real estate and the value 
of the real estate measured by the price at which similar real 
estate was readily obtainable in similar transactions, but a 
disparity between the contract price and the value of the real 
estate measured by the price at which similar real estate was 
readily obtainable in similar transactions does not, of itself, 
render the contract unconscionable. 

21 See, Trebilcock, footnote 1 supra, at p. 41. 

22Both the Clifford Davis and Macaulay decisions, footnotes 9 and 11 supra, 
involved non-consumer contracts as do most of the recent Canadian cases 
on the validity of liquidated damages clauses in equipment leases. See, for 
example, C.A.C. v. Regent Park Butcher Shop (1969), 3 D.L.R. (3d) 304 
(Man. C.A.). The now well established Federal Discount doctrine also began 
its career with a contract that technically was of a non-consumer character: 
see, Federal Discount Corp. v. St. Pierre, [1962] O.R. 310 (C.A.). 



157 

obviously shared this sentiment. Further, as has been noted, the attempt 
to confine the doctrine to consumer transactions has also been rejected in 
the recently adopted U.K. Unfair Contract Terms Act 1977. 23 

(b) SHOULD THE DOCTRINE BE RESTRICTED TO CASES OF PROCEDURAL 
UNCONSCIONABILITY? 

The distinction between substantive and procedural unconscion ability 
is one that has been heavily emphasized by some American scholars. 
Professor Leff, 24 in particular, has argued that the court's power to inter- 
fere should be restricted to cases of procedural unconscionability. Accord- 
ing to this line of reasoning, the mere existence of a harsh clause, or of a 
bargain that is improvident in its entirety, should not attract the operation 
of the doctrine unless the transaction is accompanied by elements of pro- 
cedural unconscionability; that is, some form of exploitation of the weak- 
ness, ignorance or gullibility of the other party. This approach finds some 
support in the Comments to section 2-302, although not in the text of the 
section, and in the case law under U.K. money-lenders legislation and the 
corresponding provisions in the Unconscionable Transactions Relief 
statutes of Canadian jurisdictions. On the other hand, it has been rejected 
in the Uniform Land Transactions Act. 25 

While not questioning the importance of procedural factors, the distinc- 
tion between substantive and procedural is, in our view, too rigid. We do 
not, therefore, recommend its adoption. What is "procedural" and what is 
"substantive" will frequently result in a sterile debate. These are not terms 
of art. Let us suppose an exculpatory clause is clearly flagged so that the 
buyer cannot avoid noticing its presence; should this preclude a court from 
finding the clause unconscionable if the product is the only one of its kind 
or if other manufacturers use an identical provision? What is important, it 
seems to us, is that the tribunal should be able to investigate all the circum- 
stances of a transaction without being restricted in the scope of its inquiry. 
We are fortified in our conclusion by the fact that none of the criteria of 
unconscionability listed in recent Canadian, American and U.K. legislation 
are restricted to examples of what might be considered to be procedural 
unconscionability. 

(c) SHOULD THERE BE A LIST OF CRITERIA TO GUIDE THE COURT IN 
ITS DETERMINATION OF THE ISSUE? 

A recurring complaint about the unconscionability concept as en- 
shrined in section 2-302 of the Code, has been that it is too abstract, too 
elusive, and too subjective, and that it provides the court with little assist- 
ance with respect to the factors that should be aken into consideration in 
making a finding one way or the other. This weakness is inherent in many 



^Supra, footnote 18. The Act implements the recommendations of the English 
and Scottish Law Commissions in their Second Report on Exemption Clauses 
(August, 1975), (Law Com. No. 69, Scot. Law Com. No. 39). 

24"Unconscionability and the Code — the Emperor's New Clause" (1967), 115 
U. Pa. L. Rev. 485; Trebilcock, footnote 1 supra, pp. 32-33. Compare, White 
& Summers, footnote 4 supra, pp. 128-29. 

25 Section 1-311, Comment 4. 



158 

value concepts, and is one that can never be totally removed without de- 
stroying the utility of the concept in question. Nevertheless, we consider 
that a list of non-exhaustive criteria would be useful, and should be incor- 
porated in the revised Act. 

There are numerous precedents that could be culled jn order to make up 
a suitable list. The Ontario Business Practices Act, 1974, 26 for example, 
invites the court to consider the following factors in determining whether 
a consumer representation is unconscionable: 

Section 2(b) 

(i) that the consumer is not reasonably able to protect his 
interests because of his physical infirmity, ignorance, 
illiteracy, inability to understand the language of an 
agreement or similar factors, 

(ii) that the price grossly exceeds the price at which similar 
goods or services are readily available to like consumers, 

(hi) that the consumer is unable to receive a substantial 
benefit from the subject-matter of the consumer repre- 
sentation, 

(iv) that there is no reasonable probability of payment of 

the obligation in full by the consumer, 
(v) that the proposed transaction is excessively one-sided in 

favour of someone other than the consumer, 
(vi) that the terms or conditions of the proposed transaction 

are so adverse to the consumer as to be inequitable, 
(vii) that he is making a misleading statement of opinion on 

which the consumer is likely to rely to his detriment, 
(viii) that he is subjecting the consumer to undue pressure to 

enter into the transaction. 

The U.K. Supply of Goods (Implied Terms) Act 1973 contained a shorter 
list, and one that was more specifically geared to non-consumer sale trans- 
actions. It enumerated the following matters: 27 



Section 4 



(a) the strength of the bargaining positions of the seller and 
buyer relative to each other, taking into account, among 
other things, the availability of suitable alternative pro- 
ducts and sources of supply; 

(b) whether the buyer received an inducement to agree to 
the term or in accepting it had an opportunity of buying 
the goods or suitable alternatives without it from any 
source of supply; 



26S.O. 1974, c. 131, s. 2(b). 

271973, c. 13, s. 4 (U.K.) adding s. 55(4) to the Sale of Goods Act, 1893. 

Substantially the same list of criteria appears in the Unfair Contract Terms Act 

1977, Schedule 2, replacing those in the 1973 Act. 



159 

(c) whether the buyer knew or ought reasonably to have 
known of the existence and extent of the term (having 
regard, among other things, to any custom of the trade 
and any previous course of dealing between the parties); 

(d) where the term exempts from all or any of the provisions 
of section 13, 14 or 15 of this Act if some condition is 
not complied with, whether it was reasonable at the time 
of the contract to expect that compliance with that condi- 
tion would be practicable; 

(e) whether the goods were manufactured, processed, or 
adapted to the special order of the buyer. 

Our Draft Bill 28 contains a synthesized list of criteria based on these and 
other precedents. Since the provisions are reproduced later in this chapter 
it is not necessary to summarize them here. 

(d) SHOULD THE COURT BE ABLE TO RAISE THE ISSUE OF 
UNCONSCIONABILITY OF ITS OWN ACCORD? 

A literal reading of section 2-302(2) leaves the impression that the 
court can raise the issue of unconscionability on its own motion, although 
at least one court 29 has refused to give this rendering to the words "or 
appears to the court", as they appear in UCC 2-302(2). While the question 
is not free from difficulty, we have reached the conclusion that the court 
should be entitled to raise the issue of unconscionability of its own motion. 
We so recommend, and our Draft Bill contains a provision to this effect. 30 

(e) WHAT TYPES OF RELIEF? 

Open textured as it is in one respect, section 2-302 is very circum- 
scribed in the types of relief a court may allow from an agreement or a 
clause that it finds unconscionable. 31 It seems that the court is confined to 
three remedies: (a) the court may refuse to enforce the contract; (b) it 
may enforce the remainder of the contract without the unconscionable 
clause; or, (c) it may so limit the application of any unconscionable clause 
as to avoid any unconscionable result. In our opinion, these powers are too 
restrictive and may prevent the court from doing full justice. Particularly 
noteworthy is the court's inability to allow rescission of the agreement or, 
on one construction of alternative (c), to order repayment of part of the 
price where the court finds the price to be excessive. Both these powers are 
contained in section 4 of The Business Practices Act and similar legisla- 
tion in other jurisdictions. 32 By way of comparison, it may be noted that 
The Unconscionable Transactions Relief Act 33 allows the court to re-open 



28Section 5.2. 

29Asco Mining Co. v. Gross Contracting Co. (1965), 3 U.C.C. Rep. 293, cited 
in White & Summers, footnote 4 supra, p. 115, n. 14. 

30See, Draft Bill, s. 5.2(4). 

31 White & Summers, footnote 4 supra, pp. 131-32. 

3 2 Indeed, section 4(1) (a) goes further and, on a literal reading, gives the con- 
sumer an absolute right to rescind. 

33R.S.O. 1970, c. 472, s. 2(d). 



160 

the transaction and "to set aside either wholly or in part or revise or alter 
any security given or agreement made in respect of the money lent". We 
recommend that, in addition to the remedies provided by UCC 2-302, 
similar powers be incorporated in the unconscionability provision of the 
revised Ontario Act, so as to enable the courts to do full justice as the 
circumstances may dictate. 

Section 2-302 confers no power to award damages 34 and we do not 
recommend the addition of such a provision. It is true the power exists in 
The Business Practices Act, in section 4(1) (a) and (2), but that Act is 
concerned with false and misleading representations as well as other unfair 
practices. A power to award damages for intentional or negligent mis- 
representations, which are actionable wrongs, is not necessarily appropriate 
in the case of an agreement which, although regarded as unfair, was not 
induced by misrepresentation and which, therefore, has traditionally 
attracted only equitable forms of relief. In view of the uncertain boundaries 
of the doctrine of unconscionability, especially in the non-consumer area, 
it would be unwise, in our view, to treat an unconscionable bargain as 
grounding an action in tort. Our recommendation would not, however, 
preclude a court from allowing damages where the impeached contract, 
as well as being unconscionable, was accompanied by other conduct con- 
stituting a recognized form of tort, such as fraud or duress. 

(f ) DISCLAIMER OF UNCONSCIONABILITY DEFENCES 

UCC 2-302 does not preclude the parties from excluding its terms; 
nor does UCC 1-103(3), which deals generally with excludable and non- 
excludable provisions of the Code. Given its pre-eminent character, it 
may safely be assumed that UCC 2-302 was not intended to be exclud- 
able. Nevertheless, we think it better not to leave the question in doubt, 
however tenuous the doubt may be. Accordingly, we recommend the in- 
corporation in the revised Act of a specific provision to the effect that the 
powers conferred under the unconscionability provision shall apply not- 
withstanding any agreement or waiver to the contrary. 35 

3. Legislative Proposal 

Having canvassed the various facets of a legislative doctrine of un- 
conscionability, it may be convenient now to reproduce our recommended 
version of UCC 2-302 : 36 

5.2.- (1) If, with respect to a contract of sale, the court finds the 
contract or a part thereof to have been unconscionable at 
the time it was made, the court may 

(a) refuse to enforce the contract or rescind it on such 
terms as may be just; 



34Compare, Pearson v. National Budgeting Systems, Inc. (1969), 297 N.Y.S. 2d 
59 (Sup. Ct., App. Div.). 

35 See, Draft Bill, s. 5.2(5); and compare, The Business Practices Act, S.O. 1974, 

c. 131, s. 4(8). 
36See, Draft Bill, s. 5.2. 



161 

(b) enforce the remainder of the contract without the 
unconscionable part; or 

(c) so limit the application of any unconscionable part or 
revise or alter the contract as to avoid any uncon- 
scionable result. 

(2) In determining whether a contract of sale or a part there- 
of is unconscionable, or whether the operation of an 
agreement is unconscionable under section 5.7(3), the 
court may consider, among other factors : 

(a) the degree to which one party has taken advantage of 
the inability of the other party reasonably to protect 
his interests because of his physical or mental infirmity, 
illiteracy, inability to understand the language of an 
agreement, lack of education, lack of business knowl- 
edge or experience, financial distress, or similar factors; 

(b) gross disparity between the price of the goods and the 
price at which similar goods could be readily sold or 
purchased by parties in similar circumstances; 

(c) knowledge by one party, when entering into the con- 
tract, that the other party will be substantially de- 
prived of the benefit or benefits reasonably anticipated 
by that other party under the transaction; 

(d) the degree to which the contract requires a party to 
waive rights to which he would otherwise be entitled; 

(e) the degree to which the natural effect of the trans- 
action, or any party's conduct prior to, or at the time 
of, the transaction, is to cause or aid in causing another 
party to misunderstand the true nature of the trans- 
action and of his rights and duties thereunder; 

(/) the bargaining strength of the seller and the buyer 
relative to each other, taking into account the avail- 
ability of reasonable alternative sources of supply or 
demand; 

(g) whether the party seeking relief knew or ought reason- 
ably to have known of the existence and extent of the 
term or terms alleged to be unconscionable; 

(h) in the case of a provision that purports to exclude or 
limit a liability that would otherwise attach to the 
party seeking to rely on it, which party is better able 
to safeguard himself against loss or damages; and 

(i) the general commercial setting, purpose and effect of 
the contract. 

(3) The court shall not make a finding of unconscionability 
based solely upon 



162 

(a) the factor mentioned in clause d of subsection 2; or 

(b) the fact that the contract varies or excludes a provision 
of this Act or other legal rights. 

(4) The court may raise the issue of unconscionability of its 
own motion. 

(5) The powers conferred by this section apply notwithstanding 
any agreement or waiver to the contrary. 

Subsection (1) maps out the scope of the court's power of intervention 
and the types of relief it may award. It will be noted that, as in the case 
of the Code, it covers any aspect of the contract and applies equally to 
seller and buyer. The court, however, is not entitled to exercise hindsight, 
and any finding of unconscionability must relate to the contract "at the 
time it was made". 37 Subsection (2) sets forth the criteria of unconscion- 
ability that the court "may", but is not required to, consider. These criteria 
are based on earlier precedents and do not call for further comment. Sub- 
section (3) is new, and is designed to repudiate explicitly any suggestion 
that a waiver of a party's rights, whether arising at common law or under 
the Act, is, of itself, evidence of unconscionability. We have thought it 
desirable to add this provision in order to protect the integrity of the 
general contracting out provision in the Draft Bill, 38 and to counteract 
some of the more extreme judicial reactions to disclaimer clauses where 
there is no other evidence of unfairness in the bargain. We return to this 
problem in a later chapter. 39 The rationale of subsections (4) and (5) 
have been explained previously. 

It will be noted that our draft proposal contains no reference to the 
position of third parties claiming rights under the contract whose position 
may be adversely affected by the defence of unconscionability. Our reasons 
are similar to those that were advanced 40 by us in connection with our 
earlier recommendation that abolition of the parol evidence rule should 
not be accompanied by special provisions dealing with the position of third 
parties claiming rights under the writing. 

4. A Cautionary Note 

Section 2-302 is not a universal panacea to all the difficulties that 
afflict the modern marketplace; nor was it intended to undermine the 
binding character of freely concluded bargains. As an American court put 
it eloquently, 41 "the doctrine of unconscionability is not a charter of eco- 
nomic anarchy ... a promisor can be relieved of his obligation . . . only 
when the transaction affronts the sense of decency without which business 
is mere predation and the administration of justice an exercise in book- 
keeping". UCC 2-302 is designed, rather, to make explicit a power that 



37 A contrary view was entertained by the English Law Commission (but not the 
Scottish Law Commission), footnote 23 supra, paras. 169-182. 

38See, s. 5.16. 

39/n/ra, ch. 9, sec. 7. 

WSupra, ch. 5, sec. 7. 

4iSee, Gimbel Bros., Inc. v. Swift (1970), 307 N.Y.S. 2d 952 (N.Y. City Civil 
Ct.), 954. 



163 

the courts have long exercised covertly and to put it on a more rational 
basis. We appreciate that businessmen may not welcome this additional 
layer of uncertainty. We should emphasize, however, that there has been 
no disposition on the part of American courts to use section 2-302 as a 
general dispensing agent for contractual obligations, 42 and we are confident 
that the power would be exercised at least as responsibly by Ontario courts. 

B. GOOD FAITH IN PERFORMANCE AND ENFORCEMENT 

1. Introduction 

The doctrine of good faith is a logical complement to the doctrine of 
unconscionability. 43 The distinction between the two may be stated in this 
way: the doctrine of unconscionability is concerned with fairness in the 
terms of a bargain; the doctrine of good faith, on the other hand, focuses 
on decent behaviour in the exercise of rights or duties imposed under the 
terms of the agreement or by the governing Act. Both concepts derive their 
source from a common ethical sense and from the need to protect a con- 
tracting party from an abusive exercise of power. Like unconscionability, 
the flexibility inherent in the concept of good faith is also its weakness: its 
imprecision makes for uncertainty and, in the eyes of some critics, subordi- 
nates the interests of the individual to the whims of the court. 

Good faith is not, of course, a novel concept. Since Roman times, it 
has had a continuous history, and occupies a secure place in the civilian 
systems of law. 44 In the common law, good faith is best known in connec- 
tion with the concept of the purchaser for value; but this is only one facet 
of its role. A much wider range of functions is reserved for good faith in 
regulating the performance or enforcement of contractual rights and duties. 
This is true where the contract or the governing Act confers a wide latitude 
of action, or inaction: for example, in the case of open price contracts; 45 
output, requirements and exclusive dealing contracts; 46 or, contracts con- 
taining the power to terminate at will. 47 It also applies to more specifically 
oriented situations, such as the power to reject for non-conformity, 48 or 
the right of repossession and resale in the case of secured sales where the 
buyer is in default. 49 As has been shown elsewhere, 50 behavioural guide- 
lines have been adopted by the Anglo-Canadian courts in some of these 
cases, but not in others. Sometimes the case law is unsettled. Often the 
decision is based upon an implied promise or upon canons of construction 
deemed appropriate to give the contract a "reasonable" meaning. It cannot 
therefore be said that good faith is already an integral part of our sales law. 



42 Compare, White & Summers, footnote 4 supra, p. 114, and the cases cited in 

n. 11. 
43 For a general discussion of the doctrine of good faith in sales transactions, see 

Trebilcock, "Good Faith in Sales Transactions", Research Paper No. II.3. 
Mlbid., pp. 4 et seq.\ Powell, "Good Faith in Contracts" (1956), 9 Current Legal 

Problems 16. 
45Compare, UCC 2-305. 
46Compare, UCC 2-306. 
47Compare, UCC 2-309(2). 
48UCC 2-601 et seq. 

^Uniform Commercial Code, Article 9, Part V. 
50 Trebilcock, footnote 43 supra, pp. 4 et seq. 



164 

Indeed, the opposite has often been asserted, or is generally assumed. 51 
The question is whether it should be, and if so, how good faith should be 
defined for this purpose. 

2. Code Provisions 52 

One of the many virtues of the Code is that its draftsmen clearly per- 
ceived these problems of integration and definition and attempted to supply 
some answers. The weakness of the Code provisions is that they fail to 
provide a strong and consistent framework, a result that may be ascribed 
to opposition from some sections of the Bar and, possibly, to disagreement 
among the sponsoring organizations with respect to the proper scope of 
the concept of good faith. 

The three key provisions of the Code are sections 1-203, 1-209(19), 
and 2-103(1) (b). Section 1-203 enunciates the seemingly strong rule that 
"every contract or duty within this Act imposes an obligation of good faith 
in its performance or enforcement". The critical factor, it will be noted, is 
the meaning of good faith. This term is defined in section 1-201(19) as 
meaning "honesty in fact in the conduct or transaction concerned". The 
definition was obviously based on prior statutes 53 and case law dealing with 
the defence of a purchaser for value or holder in due course. As such, the 
definition bears little relevance to the types of problem that normally arise 
in performance or enforcement issues : the issue in the latter type of context 
is not whether the party acted honestly, but whether he acted reasonably 
or fairly, which is quite a different matter. As a result, as a learned com- 
mentator has argued cogently, 54 section 1-203 has been "so enfeebled that 
it could scarcely qualify ... as an 'overriding' or 'super-eminent' principle". 

Good faith was not always so narrowly defined. In the 1949 version 
of the Code the following sentence appeared after the present definition in 
UCC 1-201(19) : 55 

Good faith includes good faith towards all prior parties and obser- 
vance by a person of the reasonable commercial standards of any 
business or trade in which he is engaged. 

This sentence was dropped, apparently because of opposition from the 
Section on Corporation, Banking and Business Law of the American Bar 
Association and others. 56 The Section gave three reasons for its opposition: 
(1) that to the average lawyer or laymen good faith principally signified 
"honesty"; (2) that the reference to reasonable commercial standards 
carried with it the implication of usages, customs or practices, and it was 



51 Powell, footnote 44 supra, at p. 25; Burrows, "Contractual Co-operation and 
the Implied Term" (1968), 31 Mod. L. Rev. 390, especially at p. 402. 

52See, generally, Farnsworth, "Good Faith Performance and Commercial Reason- 
ableness under the Uniform Commercial Code" (1963), 30 U. Chi. L. Rev. 
666; Summers, " 'Good Faith' in General Contract Law and the Sales Provi- 
sions of the Uniform Commercial Code" (1968), 54 Va. L. Rev. 195. 

53 See, UCC 1-201, Official Comment No. 19; and compare, the Bills of Exchange 
Act, R.S.C. 1970, c. B-5, s. 3 as am. 

54 Farnsworth, footnote 52 supra, at p. 674. 

55 See, Summers, footnote 52 supra, at p. 207. 

56/&M., at pp. 208-09. 



165 

often difficult to establish what these norms were for a particular trade or 
business; and, (3) that "reasonable commercial standards" could mean 
usages, customs or practices existing at a particular time and could, there- 
fore, lead to freezing of the desirable flexibility inherent in these standards. 
Despite these criticisms, the Section was not completely opposed to some 
reference to "commercial decency", or something akin to this concept. The 
Section suggested the following definition: 

'Good faith' means honesty in fact in the conduct or transaction 
concerned in the absence of trickery, deceit or improper purpose. 

This suggestion was not adopted. 

For reasons not revealed in the Code, the Code's sponsors decided 
upon a separate and higher standard of good faith for merchants involved 
in sales transactions. UCC 2-103(1) (b) provides that: 

( 1 ) In this Article unless the context otherwise requires: 

(b) 'Good faith' in the case of a merchant means honesty 
in fact and the observance of reasonable commercial 
standards of fair dealing in the trade. (Emphasis 
added.) 

It will be observed that the definition is subject to a number of important 
restrictions. First, it applies only where Article 2 itself imposes a duty of 
good faith. Only 13 of the 104 sections of Article 2 impose an explicit 
good faith requirement. Secondly, the definition is confined to merchants. 
Although, the term "merchant" is more widely defined 57 in Article 2 than 
in common usage, the statutory definition will still, if faithfully applied, 
exclude a large range of buyers and sellers. Thirdly, the definition pre- 
supposes standards of fair dealing in the trade. There may be none. 

In the light of the combined obstacles presented by UCC 1-201(19), 
1-203, and 2-103(1) (b), one American commentator has concluded 58 
that the most promising source of the application of good faith standards 
may be through the invocation of general principles of law and equity, 
sanctioned by UCC 1-103. 59 The Code case law, 60 while not overabundant 
on this point, supports this suggestion, and also indicates a judicial ten- 
dency to blur the distinction between UCC 1-203 and 2-103, and to apply 
the higher standard of good faith introduced in UCC 2-103 to other 
Articles of the Code, notably Article 9. In any event, it is clear that UCC 
1-203 provides more form than substance, and that UCC 2-103, while 
much stronger, is substantially restricted in scope. 

S7See, UCC 2-104(1). 

58 Summers, footnote 52 supra, at p. 197. 

59UCC 1-103 provides as follows: 

Unless displaced by the particular provisions of this Act, the principles of 
law and equity, including the law merchant and the law relative to capacity 
to contract, principal and agent, estoppel, fraud, misrepresentation, duress, 
coercion, mistake, bankruptcy, or other validating or invalidating cause 
shall supplement its provisions. 

60For example, In re Jackson (1971), 9 U.C.C. Rep. 1152; In re Johnson 
(1973), 13 U.C.C. Rep. 953; Urdang v. Muse (1971), 8 U.C.C. Rep. 1220. 



166 

3. Second Restatement on Contracts 

It would appear that the current members of the American Law Insti- 
tute do not share the hesitations shown by the Code's sponsors. Section 231 
of the Tentative Draft of the Second Restatement on Contracts 61 provides 
simply and elegantly: 

Every contract imposes upon each party a duty of good faith and 
fair dealing in its performance and its enforcement. 

"Good faith" is not defined, and it is not clear whether the draftsmen 
meant to confine the concept to honesty in fact, leaving "fair dealing" to 
emphasize the additional requirements of decency and reasonableness in 
the exercise and discharge of contractual rights and obligations. It will be 
noted, too, that no distinction is drawn between merchants and non- 
merchants, or between different types of contract. It seems fair to conclude 
that the Restatement has decided to reinstate good faith as an "overriding" 
and "super-eminent" principle of contract law. The rationale supplied by 
the Restatement 61 for the adoption of the higher good faith standard is 
that "good faith performance or enforcement of a contract emphasizes 
faithfulness to an agreed common purpose and consistency with the justi- 
fied expectations of the other party; it excludes a variety of types of con- 
duct characterized as involving 'bad faith' because they violate community 
standards of decency, fairness or reasonableness". The comments to sec- 
tion 231 supply many examples of types of conduct recognized in judicial 
decisions as demonstrating bad faith in performance or enforcement of 
contractual rights. It is obvious that the reporters of the Restatement 
thought that they were sufficient in scope and number to justify the broad 
principle enshrined in section 231. 

To complete the narrative of post-Code developments, it may be 
useful to note that section 1-301 of the Uniform Land Transactions Act 
has also adopted a good faith requirement in the performance or enforce- 
ment of a contract or duty governed by the Act. "Good faith" was defined 
in the version of the Act originally adopted in 1975 as "honesty in fact 
and the observance of reasonable standards of fair dealing in the conduct 
or transaction involved". 63 The accompanying Comment explained that the 
definition in UCC 2-103 was adopted in preference to the UCC 1-201 
definition. The revised Uniform Land Transactions Act version omits any 
definition of good faith. 

4. Conclusions 

Whatever the failings of the Code provisions, the Commission agrees 
that good faith should be enshrined in the revised Ontario Act as a 
minimal behavioural baseline in the exercise of contractual and statutory 
rights and obligations. We are further of the opinion that the obligation 



61 While section 231, like the earlier sections, is still in tentative form, "it is, 
however, fair to say that major changes in these formulations are unlikely, 
given the consideration they have already received": Introduction to Tentative 
Drafts Nos. 1-7 (Rev. & ed., 1973), p. viii. 

^Restatement of the Law, Contracts 2d, Section 231, Comment a. 

63See, s. 1-201(8). 



167 

of good faith should not be confined to merchants or any particular group 
of buyers and sellers. We are also agreed that the basic standard should 
be higher than honesty in fact, and that it should encompass the require- 
ment of reasonableness and fair dealing. In our opinion, it would be ano- 
malous to recognize the more substantial intervention in the contract mak- 
ing process represented by the doctrine of unconscionability, and yet to 
refuse to recognize a general obligation of good faith in the performance 
and enforcement of a contract that goes beyond honesty in fact. Nor are 
we persuaded that our proposals would leave too much to the discretion 
of the court. Our reaction is, rather, that such a doctrine of fair dealing 
accords best with the parties' own presumed intention of the meaning of 
their contract or, where the exercise of a statutory power is involved, the 
intention of the legislature. 

In the light of these conclusions we recommend adoption of the 
following provisions in the revised Act: 64 

( 1 ) Every right and duty that is created by a contract of sale or by 
this Act imposes an obligation of good faith in its enforcement 
or performance whether or not it is expressly so stated. 

(2) 'good faith' means honesty in fact and the observance of reason- 
able standards of fair dealing. 

In our opinion, a definition of good faith is essential. We recognize the 
force of the argument 65 that good faith has no invariant meaning but 
takes its colour from the surrounding circumstances of individual cases. 
Nevertheless, given the absence of a consistent body of Anglo-Canadian 
case law, some guidance to the courts is necessary if a new period of 
uncertainty is to be avoided. The proposed definition of good faith is suf- 
ficiently flexible to allow ample scope for adjustment to the exigencies of 
individual cases. It will be observed that our definition of good faith is not 
restricted in its application to the parties to the contract. We have con- 
sidered whether it should be so restricted, and whether a lower standard 
of conduct — honesty in fact — should be sufficient for third parties. We 
have decided against such a distinction on two grounds. The first is that 
it has not been drawn by the American courts in applying the comparable 
provisions in the Code. 66 The other ground is that there is, in our view, 
no sufficient reason why third parties claiming rights and powers under 
the revised Act should be in any different position in this respect than the 
parties to the contract of sale. 

It will be noted that our recommended provision differs from UCC 
1-203 in another respect. Our provision applies to the exercise of rights, 
contractual or statutory, as well as to the performance of obligations. It 
would seem obvious that the need for a good faith standard is as great 
in the former case as it is in the latter. Presumably, section 1-203 did not 
intend a different result, but it seems better to put the matter beyond 
doubt. It should be noted, too, that the good faith obligation applies to 

64See, Draft Bill, ss. 3.2, and 1.1(1) 15. 
65 Summers, footnote 52 supra, at pp. 196, 215-16. 

<*See, for example, Mattek v. Malofsky (1969), 165 N.W. 2d 406 (Wis. Sup. 
Ct.). 



168 

all provisions of the revised Act; unlike Article 2 it is not confined to 
those sections where good faith is expressly stipulated. Nevertheless, in our 
Draft Bill we have thought it useful to retain the Code identifiers, and 
indeed to add to them to a modest extent, in order to help the courts and 
the parties identify readily those situations in which experience has shown 
the good faith component to be particularly important. It should be clearly 
understood, however, that we consider the good faith obligation to be 
all-encompassing; no adverse inferences should be drawn from the absence, 
in any particular provision, of any express stipulation. 

An important question has been raised 67 concerning the binding 
character of good faith obligations. UCC 1-102(3) provides that the 
obligations of good faith, diligence, reasonableness and care prescribed by 
the Code "may not be disclaimed by agreement but the parties may by 
agreement determine the standards by which the performance of such 
obligations is to be measured if such standards are not manifestly unrea- 
sonable". Notwithstanding this seemingly clear provision it has been 
argued 68 that the doctrine of good faith is little more than a canon of 
construction, in that it merely creates a statutory presumption that the 
parties have intended their rights and obligations under the contract to be 
performed in good faith. According to this view, good faith, like other 
presumptions, should be rebuttable by the express terms of the agreement. 
It would then be for the court, applying the doctrine of unconscionability 
or some other substantive law doctrine, to decide whether exclusion of the 
good faith requirement was reasonable or not. However, this reasoning 
appears to us to be based upon a misreading of UCC 1-203, and we do 
not support it. Whatever the pre-Code position may have been, it seems 
clear that section 1-203 was intended to create more than a statutory pre- 
sumption. Like section 2-302 dealing with unconscionability, it was seen 
as a minimum rule of decent behaviour. It seems to us that it would be as 
inappropriate to permit the exclusion of the one as it would be to permit 
the exclusion of the other. For the reasons we have stated, it should not, 
in our opinion, be possible to disclaim the obligation of good faith by 
agreement. We consider, however, that, as in UCC 1-102(3), the parties 
should be able, by agreement, to determine the standards by which the 
performance of the obligation of good faith is to be measured, if such 
standards are not manifestly unreasonable. Accordingly, we recommend 
that the revised Act should contain a provision similar to UCC 1-102(3). 
Our Draft Bill so provides. 69 

We recognize that the terms of the contract may affect the scope 
of the good faith obligation in a particular case. Suppose for example, 
that a requirements contract is silent about the possible range of fluctua- 
tions in the buyer's requirements. The contract would, in these circum- 
stances, be interpreted in the light of the parties' past dealings, if any, 
and the provisions of UCC. 2-306, which includes a good faith stand- 
ard. The buyer would not be free to act capriciously. Let us suppose, 
however, that the contract expressly provides that the buyer is not required 



67 See, Trebilcock, footnote 43 supra, pp. 76-77. 

mbid. 

6 9See, Draft Bill, s. 3.1(2). 



169 

to have minimum requirements, or that he is free to increase his require- 
ments at any time up to 100 per cent of his average requirements during 
a given period. As long as the buyer is acting honestly, he should be 
entitled to invoke these provisions, even though he would not have had the 
same freedom had the contract been of the first type. To this extent, it is 
true to say that good faith is a matter of construction. This is not the 
same thing as saying that good faith itself may be excluded as a normative 
requirement. 

5. Good Faith In Bargaining 

The research paper prepared for the Commission demonstrates 70 that 
good faith can play as important a role in preventing abuses in the negoti- 
ating stage of a contract as it plays in policing performance practices. The 
paper therefore recommends that the revised Act, or perhaps a Law of 
Contract Amendment Act, recognize this fact by explicitly extending the 
good faith requirement to the pre-contractual phase. While we are gen- 
erally sympathetic to this suggestion, it appears to us, on at least two 
grounds, that action on the proposal should be deferred for the time being. 
First, the Anglo-Canadian case law is still fragmentary, and no clear 
principle emerges from the decided cases. It would be unwise, therefore, 
to press statutory reform before the full implications of the change are 
grasped. The second reason is that the kind of provision contemplated will 
depend very much on future reform of the law of consideration 71 and on 
the adoption of a general principle of injurious reliance comparable to 
section 90 of the American Second Restatement on Contracts. If a provi- 
sion similar to section 90 is adopted, the need for a separate rule to govern 
good faith in bargaining will be much diminished, although by no means 
totally eliminated. 

RECOMMENDATIONS 

The Commission makes the following recommendations: 

1. The revised Act should contain a general provision empowering 
the court to refuse to enforce a contract, or a term thereof, on 
the ground of unconscionability. This provision should incor- 
porate the following features: 

(a) The provision should not be confined to consumer sales; 
nor should the court's powers be restricted to cases of pro- 
cedural unconscionability. 

(b) The provision should contain the following non-exhaustive 
list of criteria to assist the court in its determination of the 
issue of unconscionability: 

(a) the degree to which one party has taken advantage 
of the inability of the other party reasonably to protect 
his interests because of his physical or mental infirmity, 
illiteracy, inability to understand the language of an 



™Supra, footnote 43, Part III. 
71 Compare, supra, ch. 5, sec. 4. 



170 

agreement, lack of education, lack of business knowl- 
edge or experience, financial distress, or similar factors; 

(b) gross disparity between the price of the goods and the 
price at which similar goods could be readily sold or 
purchased by parties in similar circumstances; 

(c) knowledge by one party, when entering into the con- 
tract, that the other party will be substantially deprived 
of the benefit or benefits reasonably anticipated by that 
other party under the transaction; 

(d) the degree to which the contract requires a party to 
waive rights to which he would otherwise be entitled; 

(e) the degree to which the natural effect of the transac- 
tion, or any party's conduct prior to, or at the time of, 
the transaction, is to cause or aid in causing another 
party to misunderstand the true nature of the trans- 
action and of his rights and duties thereunder; 

(/) the bargaining strength of the seller and the buyer 
relative to each other, taking into account the availa- 
bility of reasonable alternative sources of supply or 
demand; 

(g) whether the party seeking relief knew or ought reason- 
ably to have known of the existence and extent of the 
term or terms alleged to be unconscionable; 

(h) in the case of a provision that purports to exclude or 
limit a liability that would otherwise attach to the party 
seeking to rely on it, which party is better able to safe- 
guard himself against loss or damages; and 

(/) the general commercial setting, purpose and effect of 
the contract. 

(c) The provision should make it clear that a waiver of a party's 
rights, whether arising at common law or under the Act, 
is not, of itself, evidence of unconscionability. 

(d) The provision should state specifically that the powers con- 
ferred under the unconscionability section shall apply not- 
withstanding any agreement or waiver to the contrary. 

2. The court should be able to raise the issue of unconscionability 
of its own motion. 

3. The court should be empowered to grant the following types of 
relief: 

(a) to refuse to enforce the contract or rescind it on such terms 
as may be just; 

(b) to enforce the remainder of the contract without the uncon- 
scionable part; or 



171 

(c) to so limit the application of any unconscionable part or 
revise or alter the contract as to avoid any unconscionable 
result. 

4. There should be no power to award damages where the court 
finds an agreement unconscionable. This recommendation should 
not, however, preclude a court from allowing damages where 
the impeached contract, as well as being unconscionable, was 
accompanied by other conduct constituting a recognized form of 
tort, such as fraud or duress. 

5. The unconscionability provision should not be accompanied by 
special provisions dealing with the position of third parties claim- 
ing rights under a contract whose rights may be adversely affected 
by a defence of unconscionability. 

6. Good faith, as a minimum behavioural baseline in the exercise 
of contractual and statutory rights and obligations, should be 
incorporated in the revised Ontario Act. The obligation of good 
faith should not be confined to merchants or to any particular 
group of buyers and sellers. 

7. The basic standard of good faith should be higher than honesty 
in fact, and should encompass the requirement of reasonableness 
and fair dealing. 

8. Specifically, the revised Act should contain the following pro- 
visions on good faith: 

(1) Every right and duty that is created by a contract of sale 
or by this Act imposes an obligation of good faith in its 
enforcement or performance whether or not it is expressly 
so stated. 

(2) 'good faith' means honesty in fact and the observance of 
reasonable standards of fair dealing. 

9. The obligation of good faith should not be restricted to parties 
to the contract. 

10. It should not be possible to disclaim the obligation of good faith 
by agreement, although, as in UCC 1-102(3), the parties should 
be able, by agreement, to determine the standards by which the 
performance of the obligation of good faith is to be measured, if 
such standards are not manifestly unreasonable. 

11. No action should be taken at the present time to give statutory 
sanction to a principle of good faith in bargaining. This position 
should be reviewed in the light of any future changes in the On- 
tario law of consideration. 



CHAPTER 8 



COURSE OF DEALING AND USAGE 
OF TRADE, AND SOME SPECIFIC 
CONSTRUCTIONAL ISSUES 



1. Course Of Dealing and Usage Of Trade 1 

A course of dealing between the parties and usage of trade have 
long been recognized as serving two important roles in relation to con- 
tracts of sale and other mercantile contracts. They have been used, first, 
to give meaning to the express language adopted by the parties and, sec- 
ondly, to supplement or qualify the express terms of a contract with terms 
presumptively imported because of past dealings between the parties, or 
because they are commonly observed by members of a trade or merchants 
trading in a particular locality. The Sale of Goods Act recognizes these 
roles, but only fragmentary; 2 the closest to a generalized statement is 
section 53 which provides as follows: 

Where any right, duty or liability would arise under a contract of 
sale by implication of law, it may be negatived or varied by express 
agreement or by the course of dealing between the parties, or by 
usage, if the usage is such as to bind both parties to the contract. 

This language falls far short of a comprehensive statement of the role of 
course of dealing or usage of trade: the section is only concerned with the 
exclusionary role of usage of trade and course of dealing. UCC 1-205(3), 
on the other hand, provides: 

A course of dealing between parties and any usage of trade in the 
vocation or trade in which they are engaged or of which they are or 
should be aware give particular meaning to and supplement or qualify 
terms of an agreement. 

This provision leaves no doubt about the central role of these concepts. 
In our view, it would be desirable to incorporate a similar provision in the 
revised Ontario Act, and we so recommend. 3 

(a) COURSE OF DEALING 

Neither course of dealing nor usage of trade is defined in the Ontario 
Act. A frequently quoted dictum of McCardie, J., 4 describes course of 
dealing as meaning that "past business between the parties raises an im- 
plication as to the terms to be implied in a fresh contract, where no express 

!See, generally, Williston on Contracts (3rd ed., 1961), Vol. 5, sees. 648-61; 
Corbin on Contracts (1960), Vol. 3, sees. 557-58; Restatement of the Law, 
Contracts 2d, sees. 246-49; Benjamin's Sale of Goods (1974), paras. 152, 925 
and 156; Duesenberg and King, Sales and Bulk Transfers Under the Uniform 
Commercial Code, Bender's Uniform Commercial Code Service, Vol. 3, 
pp. 4-126 to 4-133; Scrutton on Charterparties, (18th ed., 1974), pp. 14 et seq. 

2See, ss. 9(1), 15.3, 29(4) and 53. 

3See, Draft Bill, s. 4.7(1). 

^Pocahontas Fuel Co. Inc. v. Ambatielos (1922), 27 Com. Cas. 148, 152. 

173 



174 

provision is made on the point at issue". UCC 1-205(1) defines the ex- 
pression as "a sequence of previous conduct between the parties to a 
particular transaction which is fairly to be regarded as establishing a 
common basis of understanding for interpreting their expressions and other 
conduct". 5 The Code definition emphasizes the essential ingredient of 
regular dealings, as contrasted with scattered transactions, and this require- 
ment also appears in the Anglo-Canadian case law. 6 Subject to what we 
say hereafter, we therefore recommend adoption of the Code definition of 
course of dealing in the revised Sale of Goods Act. 7 

We have considered whether it is necessary to retain the Code re- 
quirement of a "sequence" of previous conduct since, in our view, what 
matters is not the frequency of the parties' previous dealings, but whether 
it may "fairly be regarded as establishing a common basis of understand- 
ing"; 8 although there is some difference of opinion between us, we have 
no strong views either way. Our draft provision, however, does not require 
a "sequence" of previous conduct. 9 It will also be noted from the use of 
the words "may fairly be regarded", that the Code definition adopts an 
objective test with respect to whether agreement on missing terms can be 
implied from the parties' previous dealings. In McCutcheon v. David 
MacBrayne, 10 on the other hand, Lord Devlin was of the view that actual 
knowledge of, and assent to, express terms appearing in previous contracts 
concluded between the parties needed to be shown before such terms 
could be imported into subsequent agreements. This opinion has not, 
however, been followed in later cases. 11 On this point, too, therefore, the 
weight of judicial opinion supports the Code approach. 

(b) USAGE OF TRADE 

The Code definition of this expression, and its tests with respect to 
the admissibility of evidence of usage of trade, present greater difficulties. 
At least at first sight, the provisions of the Code appear to differ in several 
important respects from the common law test of admissibility generally 
adopted in England and Canada. UCC 1-205(2) reads in part: 

A usage of trade is any practice or method of dealing having such 
regularity of observance in a place, vocation or trade as to justify an 
expectation that it will be observed with respect to the transaction 
in question. 



SCompare, UNCITRAL draft Convention (1977), Art. 7(1), which provides: 
The parties are bound by any usage to which they have agreed and by any 
practices which they have established between themselves. 
6For example, J. Spurling Ltd. v. Bradshaw, [1956] 1 W.L.R. 461, 467 (C.A.); 
Henry Kendall & Sons v. Wm. Lillico & Sons Ltd., [1969] 2 A.C. 31, es- 
pecially at p. 113 (H.L.); Hollier v. Rambler Motors A.M.C. Ltd., [1972] 2 
Q.B. 71 (C.A.). 
7See, Draft Bill, s. 1.1(1)9. 
Vbid. 
9lbid. 

10[1964] 1 W.L.R. 125, 134-35, [1964] 1 All E.R. 430, 437 (H.L.). 
uSee, Benjamin, footnote 1 supra, para. 925. 



175 



UCC 1-205(4) further provides: 

The express terms of an agreement and an applicable course of deal- 
ing or usage of trade shall be construed wherever reasonable as con- 
sistent with each other; but when such construction is unreasonable 
express terms control both course of dealing and usage of trade and 
course of dealing controls usage of trade. 

An authoritative English exposition, 12 on the other hand, requires that, 
to be admissible, "the custom [sic] must be reasonable, universally ac- 
cepted by the particular trade or profession or at the particular place, 
certain, not unlawful and not inconsistent with the express or implied 
terms of the contract". 

The following points of difference between the common law test of 
admissibility adopted in England and Canada and the language of the Code 
require consideration. 

(i) Universal Acceptance 

This common law requirement appears to us to confuse the concepts 
of custom and usage. As Williston points out, 13 there are important dif- 
ferences between these two concepts. A custom, once established, becomes 
part of the law of the land and is binding on the parties whether they know 
of it or not. There are, therefore, good reasons for requiring strict proof 
of its initial establishment. Usage of trade, as an element of a contract, is 
predicated on the parties' implied intentions; that is, what they may fairly 
have had in contemplation at the time of the formation of the contract. 
Universal acceptance of the usage at issue is not likely to have been con- 
templated by the parties. We agree with the Code 14 that "regularity of 
observance", such as to justify an expectation that the usage will be ob- 
served with respect to the transaction in question, is a more realistic as- 
sessment of the parties' intentions than a requirement of universality, 15 
and our draft provision follows the Code in this respect. 16 

(ii) Certainty 

This common law requirement is not expressly included in the Code 
definition, but is implicit in the requirement of regularity of observance. 
A usage without a firm content is a contradiction in terms. As the Com- 
ment to the Code provision points out, 17 however, where the precise 
amount of variation from the Code's general rules has not been worked 
out into a single standard (for example, with respect to the degree of devia- 
tion permitted in a contract for the supply of a commodity), "the party 
relying on the usage is entitled, in any event, to the minimum variation 

12 Ibid., para. 844, paraphrasing Scrutton, footnote 1 supra, p. 23. 

MSupra, footnote 1, sec. 649. 

14UCC 1-205(2). 

15 A "regularity of observance" test is also adopted in Art. 7(2) of the 

UNCITRAL draft Convention. 
i^See, Draft Bill, s. 1.1(1)25. 
17UOC 1-205, Comment 9. 



176 

demonstrated". This adds a heavy gloss to the statutory definition. Our 
recommended draft definition of "usage of trade" does not deal with the 
point specifically; we think it best to leave it for the trier of fact to deter- 
mine whether there is such regularity of observance with respect to a 
minimum permissible variation as to justify giving it effect. 

(iii) Reasonableness 

This requirement of the Anglo-Canadian test is also omitted from 
the Code definition, although it appears from Comment 6 to UCC 1-205 
that the draftsmen intended the general test of unconscionability in UCC 
2-302 to apply. 18 Should, then, a requirement of reasonableness be in- 
corporated specifically in the definition of "usage of trade"? On the face 
of it, it seems anomalous, as Williston has pointed out, 19 that greater con- 
cern should be expressed for the reasonableness of terms implied by usage 
of trade, than for the same terms spelled out expressly in the agreement. He 
explains the apparent paradox 20 on the ground that, in the former case, 
there is only constructive assent to the implied terms; in the latter case, 
there is express assent. However, this distinction is only valid where the 
person sought to be bound by the usage is not a member of the trade in 
which the usage is observed; for example, a principal who retains the ser- 
vices of a broker to purchase goods on a commodities market. 21 It would 
be odd, on the other hand, if brokers trading in the same market could 
plead ignorance of their own usages. The case law 22 strongly suggests that 
a usage is much more likely to be found unreasonable in the first type of 
case (that is, where one of the parties is not a member of the trade in 
which the usage is observed), than in the second. The same result could 
be achieved by reasoning that, where a usage is seriously inimical to the 
interests of a person who is not a member of the group among whom it 
is observed, it cannot fairly be assumed that he intended it to apply to 
the transaction in question. Be that as it may, the concept of reasonable- 
ness occupies such an established place in the jurisprudence that we think 
it should be retained as part of the definition of usage of trade, and we so 
recommend. 23 On the basis of past precedents, the courts should have no 
difficulty in distinguishing its differential role depending on the status of 
the person sought to be charged with the usage. 

(iv) Inconsistency 

Once again there are serious analytical difficulties about taking at face 
value the common law proposition that a usage that is inconsistent with the 

iSHowever, as Professor Patterson points out in NYLRC Study, ch. 5, footnote 
52, supra, at pp. (326-27), the Comment is misleading, since UCC 2-302 only 
applies to Article 2 transactions. 

WSupra, footnote 1, sec. 658. 

™lbid., sec. 659. 

21 This was true in the leading case of Robinson v. Mollet (1875), L.R. 7 E. and 
I. App. 802. See, also, the persuasive distinction drawn in Restatement of the 
Law, Contracts 2d between the relevance of reasonableness of a usage when 
invoked to interpret an agreement, and its relevance to supplement or qualify 
the terms of the agreement: sec. 246, Comment c, and sec. 247, Comment a. 

22 See the cases cited in Scrutton, footnote 1 supra, pp. 17 et seq. 

23See, Draft Bill, s. 1.1(1)25. 



177 

express terms of the agreement, or with the terms that would otherwise 
be implied at law, is not admissible to interpret or supplement the agree- 
ment. As others have pointed out, 24 such a proposition, taken to its logical 
conclusion, would exclude evidence of all usages, since, by definition, all 
such evidence must vary the literal terms of the agreement; otherwise 
there would be no point in introducing it. It may be that the parties have 
consciously adopted express language with a view to overriding an implied 
term that would otherwise be annexed by usage; but a simple test of in- 
consistency does not appear to us sufficient to evince such an intention. 
As in the case of the parol evidence rule, there is, in our view, no simple 
linguistic formula, no rule of thumb, that can resolve the difficult con- 
structional problems. UCC 1-205(4) starts with the admonition that ex- 
press terms and any applicable usage of trade or course of dealing shall 
be construed "wherever reasonable" as consistent with one another; it is 
only when such a construction is "unreasonable" that the extrinsic evi- 
dence must yield to the express language of the contract. 25 We think that 
this is a more helpful way of stating the task confronting the court than a 
test of inconsistency. Admittedly, a test of reasonableness leaves as much 
to judicial discretion as a test of inconsistency, 26 but at least the Code 
formulation is heavily biased towards admissibility. We therefore favour 
a test of reasonableness in preference to the traditional common law test, 
and our definition of "usage of trade" does not include a test of consis- 
tency. 

(c) CONCLUSION 

Our overall conclusion is that the revised Act should explicitly recog- 
nize course of dealing and usage of trade as constructional tools and 
sources of implied terms of the agreement. 27 We are also of the view that 
the Code description of these, terms, 28 and of their relationship to each 
other and to the express terms of the agreement, 29 are suitable for adop- 
tion in the revised Ontario Act. 

2. Uncertainty Of Terms 30 

(a) general considerations 

Businessmen are often men on the wing. They do not write agree- 
ments with the precision or elegance of an equity draftsman. Not infre- 



24 Scrutton, footnote 1 supra, p. 19; Williston, footnote 1 supra, sec. 652, espe- 
cially at p. 42. 

25 The same test is applied in Restatement of the Law, Contracts 2d, sec. 228(5). 

26 See, the Code cases cited in Duesenberg and King, footnote 1, supra, p. 4-132, 
n. 71. 

27See, Draft Bill, s. 4.7. 

28See, Draft Bill, ss. 1.1(1)9 and 1.1(1)25. 

Wlbid., s. 4.7(4). It will be noted that, in order to avoid unnecessary duplication 
of provisions, we have combined these aspects of UCC 1-205 and the corres- 
ponding aspects of UCC 2-208(2), so as to produce a single integrated provi- 
sion. 

30 See, also, Neilson, "The Uncertainty of Terms in Sale Transactions", Research 
Paper No. II.5. 



178 

quently, there are elements of uncertainty or ambiguity about one or more 
terms of the bargain. Some important terms may be left unstated. Others 
may be sketched in broad outline, the parties' intention being to complete 
the details at a later date. In long term agreements, or in periods of intense 
inflation, the parties may recognize the difficulty of fixing in advance the 
price of a commodity subject to sharp market fluctuations, and therefore 
leave it to be decided by future agreement. 

In all these cases the law is confronted with a basic dilemma: to 
what extent can, or should, it make good the deficiencies in the parties' 
agreement? Two conflicting principles can be discerned in the abundant 
case law involving this range of problems. The one declines to become a 
mender of imperfect bargains, and abides by the rule that a contract that 
fails to specify the essential elements of the agreement is void for uncer- 
tainty. The other, persuasively articulated in Lord Wright's masterful 
judgment in Hillas & Co. v. Arcos, 31 seeks to uphold commercial agree- 
ments wherever possible by invoking "the legal implication in contracts 
of what is reasonable, which runs throughout the whole of modern Eng- 
lish law in relation to business contracts". The conflict in judicial attitude 
is particularly acute in those cases in which the parties have expressly left 
one or more terms, typically terms involving the price, to be decided by 
future agreement. 

The criticism has been made 32 that the courts that refuse to enforce 
such agreements frequently confuse two very different questions. The 
first question is whether, on the basis of the available evidence, the parties 
believed they had entered into a binding agreement. Secondly, if this was 
their intention, is there some reasonable basis upon which the court can 
complete the unsettled term? According to this criticism, 33 the assumption 
that an "agreement to agree" clause is inconsistent with the intention to 
conclude an immediately binding bargain, flies in the face of commercial 
realities and would potentially invalidate many agreements concluded 
every day. A more attractive supposition is that the parties intended rea- 
sonable terms to govern the missing elements in the unlikely event that 
they were unable to reach agreement by themselves. There could be ex- 
ceptions. The intensely subjective nature of the missing terms, or the 
absence of objective data upon which the court could substitute its judg- 
ment for the parties' agreement, might point to the conclusion that the 
parties did not mean to be bound until the terms were settled. However, 
this type of approach is very different from the one that rejects out of hand 
an apparent agreement that is tainted with a clause requiring future agree- 
ment on one or more terms. 

(b) UNCERTAINTY AS TO PRICE 

The Sale of Goods Act offers only limited assistance in the resolu- 
tion of the problems referred to above. Where the contract is silent as to 
price, section 9(2) of the Act provides that the buyer shall pay a reason- 
able price. However, it was held by the House of Lords in May and 

31(1932), 147 L.T. 503 (H.L.), 517. 
32Neilson, footnote 30 supra, pp. 9-10. 
33Jbid., pp. 42 et seq. 



179 

Butcher, Limited v. The King, 34 that this provision cannot be invoked 
where the price has been expressly reserved for future agreement. Where 
silence surrounds other terms, the presumptive rules of the Act concerning 
the implied conditions and warranties of title and quality, 35 the time of 
transfer of the property, 36 the place and time of delivery, 37 the buyer's 
payment obligations, 38 and so forth, will come into play as gap fillers. But 
in these cases, as in the case of price, there is no guiding principle to 
assist the courts where the parties appear to have reserved the question 
for future agreement. 

One of the great merits of Article 2 is that it rectifies this omission. 
Section 2-204(3) provides as follows: 

(3) Even though one or more terms are left open a contract for sale 
does not fail for indefiniteness if the parties have intended to 
make a contract and there is a reasonably certain basis for 
giving an appropriate remedy. 

The Commission agrees with the approach taken by this provision. In our 
view, where the parties have intended to enter into a binding contract of 
sale and there is a reasonably certain basis for giving an appropriate 
remedy, the contract should not fail by reason of the absence of one or 
more terms, even where such terms have been left open for future agree- 
ment. Accordingly, we recommend the inclusion in the revised Act of a 
provision similar to UCC 2-204 ( 3 ). 39 

Section 2-305 spells out the implications of the approach taken in 
UCC 2-204(3) in the specific context of price. The section reads as fol- 
lows: 

(1) The parties if they so intend can conclude a contract for sale 
even though the price is not settled. In such a case the price is 
a reasonable price at the time for delivery if 

(a) nothing is said as to price; or 

(b) the price is left to be agreed by the parties and they fail to 
agree; or 

(c) the price is to be fixed in terms of some agreed market or 
other standard as set or recorded by a third person or 
agency and it is not so set or recorded. 

(2) A price to be fixed by the seller or by the buyer means a price 
for him to fix in good faith. 

(3) When a price left to be fixed otherwise than by agreement of 
the parties fails to be fixed through fault of one party the other 
may at his option treat the contract as cancelled or himself fix 
a reasonable price. 



34[1934] 2 K.B. 17 n. (H.L.), 

35Ss. 13-16. 

36Ss. 18-19. 

37S. 28. 

38S. 27. 

39See, Draft Bill, s. 4.2(4). 



180 

(4) Where, however, the parties intend not to be bound unless the 
price be fixed or agreed and it is not fixed or agreed there is 
no contract. In such a case the buyer must return any goods 
already received or if unable so to do must pay their reason- 
able value at the time of delivery and the seller must return any 
portion of the price paid on account. 

It will be observed that the operative principle of section 2-305 turns on 
whether the parties intended to enter into a binding contract, not on 
whether they reserved for future agreement the price to be paid by the 
buyer. Combined with the surrounding circumstances, a clause reserving 
for future agreement the price to be paid may be evidence of an intention 
not to be bound until the missing term is completed; but it is not conclu- 
sive. We support the Code's approach in respect of price as well as in 
respect of other unsettled terms and, subject to the modifications dealt 
with below, recommend its adoption in the revised Ontario Sale of Goods 
Act in place of sections 9 and 10 of the existing Act dealing with price. 40 

A number of other differences should be noted between section 2-305 
and sections 9 and 10 of The Sale of Goods Act. Section 10 provides that, 
where the price is to be fixed by the valuation of a third party and he 
cannot or does not make the valuation, the agreement is avoided subject 
to the buyer's obligation to pay for any goods that have been delivered to 
or appropriated by him. It is not entirely clear how the same problem is 
intended to be dealt with under the Code. Section 2-305(1) (c) refers to 
a price to be fixed "in terms of some agreed market or other standard", 
thus permitting the inference that the reasonable price formula is not to be 
applied where the valuation is to be made by a particular person. How- 
ever, such a literal construction would run counter to the basic principle 
expressed in the first sentence of the subsection, and is in conflict with the 
examples cited in Comment 4 to the section. We therefore recommend that 
the Ontario version of section 2-305(1) (b) be amended to read as 
follows : 

(b) the price is left to be agreed by the parties or a third person 
and they fail to agree or the third person fails to fix the price. 

Section 2-305 also differs from section 10 in its treatment of the con- 
sequences where the price fails to be fixed, other than where the price is 
to be fixed by agreement, through the fault of one of the parties. UCC 
2-305(3) affords the innocent party the option of treating the contract 
as cancelled 41 or himself fixing a reasonable price. 42 Under the corres- 
ponding provision in section 10(2) of The Sale of Goods Act, which is 
limited to cases where a third party is prevented from making the valua- 
tion by the fault of the seller or buyer, the innocent party is restricted to 



™lbid., s . 5.3. 

4 i "Cancellation" is defined in UCC 2-106(4) as occurring when either party puts 

an end to the contract for breach by the other but without prejudice to any 

remedy he may have for breach of contract. 
42 Some commentators have noted an apparent conflict between sections 2-305(3) 

and 2-305(1 )(c) where the failure of the third person to fix a price under the 

latter provision is due to the fault of one party. We have proceeded on the 

assumption that, in such a case, subsection (3) prevails. 



181 

an action in damages. Comment 5 to UCC 2-305 explains the Code's 
option as an example of a failure to take cooperative action, "thus shifting 
to the aggrieved party the reasonable leeway in fixing the price". A com- 
parable approach is taken in UCC 2-311(3) with respect to other failures 
in cooperation by one or the other party. Later in this chapter, 43 we 
recommend adoption of UCC 2-311(3) subject to a minor modification. 
The Commission is of the view that a provision similar to UCC 2-305(3) 
should also be included in the revised Ontario Act. 44 

(c) OUTPUT, REQUIREMENTS, AND EXCLUSIVE DEALINGS CONTRACTS 45 

An important range of commercial contracts that is not referred to 
at all in The Sale of Goods Act involves output, requirements, and exclu- 
sive dealings contracts. In an output contract, the supplier undertakes to 
sell his total output of a specified product to the buyer. In a requirements 
contract, the buyer obligates himself to meet all his requirements from the 
seller. In an exclusive dealings contract, the seller agrees to appoint the 
buyer as his exclusive "selling agent" in a territory designated for the 
purpose. An exclusive dealings and a requirements contract may overlap. 

These types of contract are well established and serve important 
commercial purposes. An output contract provides the seller with a firm 
outlet for his product, and enables him to plan his production more ra- 
tionally; indeed, in some instances, he might not find it economical to 
build a manufacturing plant without such a commitment. A requirements 
contract provides the buyer with an assured source of supply of raw mater- 
ials. Exclusive dealings contracts are geared to distributive and merchand- 
ising techniques; they are designed to provide a merchant with an incen- 
tive to handle a new line of goods when he might otherwise be reluctant 
to do so. Because of their restrictive features, exclusive dealings contracts 
may raise problems relating to restrictive trade practices. 46 

(i) Output and Requirements Contracts 

Output and requirements contracts raise at least three distinct ques- 
tions. The first question relates to consideration, the second to indefinite- 
ness, and the third to the scope of the obligations undertaken by the 
parties. 

The first question is whether there is sufficient consideration to sup- 
port the enforceability of the bargain. Some early American cases raised 
this question 47 on the ground that, in a requirements contract, the buyer 



ttlnfra, sec. 2(e). 

44See, Draft Bill, s. 5.3(4). 

45 See, Waddams, "Output and Requirement Contracts and Exclusive Dealing 
(UCC 2-306)", Research Paper No. II.9C; and compare, White & Summers, 
Handbook of the Law Under the Uniform Commercial Code (1972), pp. 103- 
109, and Comments in (1954), 102 U. Pa. L. Rev. 654, and (1965), 78 Harv. 
L. Rev. 1212. 

46See, the Combines Investigation Act, R.S.C. 1970, c. C-23, as am. by S.C. 
1974-75-76, c. 76, s. 12, adding s. 31.4. 

47 See, Duesenberg and King, footnote 1 supra, pp. 4-48/49. 



182 

did not promise to have any requirements. The converse reasoning could 
be applied in an output contract. The argument appears particularly ap- 
pealing where, in the case of a requirements contract, the buyer has no 
established business and there are no benchmarks to indicate his probable 
requirements. 48 Nevertheless, later pre-Code cases 49 rejected these objec- 
tions, and reasoned that there was consideration for the buyer's promise 
in a requirements contract since he restricts his freedom by binding 
himself to do one of two things — to buy from the particular seller or not 
to buy at all. 50 UCC 2-306(1), which will be discussed more fully here- 
after, contains the Code provision on output and requirements contracts 
but does not address itself to the problem of consideration. It is clear, 
however, from Comment 2 to the section that the draftsmen endorsed 
the later pre-Code position. 

The Anglo-Canadian authorities on this question are sparse, 51 but 
would appear to support the argument that sufficient consideration exists 
to make output and requirements contracts enforceable. We have con- 
sidered whether the revised Ontario Act should include a statement to 
this effect, but have concluded that it is not necessary. As will be seen, 
we recommend below the adoption of a modified version of UCC 
2-306(1). Since it assumes the enforceability of output and requirements 
contracts, this should, in our view, be sufficient. 

A closely related question, raised in some American cases, 52 is 
whether an output or requirements contract may be incapable of enforce- 
ment because of indefiniteness. In these cases, the courts seem to have 
been impressed with the difficulty of determining the parties' obligations, 
especially, once again, in those cases where the buyer had no established 
business or, in the case of an agent or jobber, where his requirements 
might be subject to sharp fluctuations. This defence, too, appears to have 
been rejected by the majority of American courts, and is explicitly re- 
jected in the Code Comments to section 2-306. As has been observed in 
a leading American textbook, 53 "the mere existence of an open quantity 
term does not support invalidation, since indefiniteness is inherent in re- 
quirements contracts". 

This particular aspect of output and requirements contracts does not 
appear to have been canvassed in the Anglo-Canadian authorities, al- 
though, of course, our courts are no strangers to problems of uncertainty 
in other areas of contract law. For the same reasons that were advanced 
with respect to the issue of consideration, we see no need for a special 
statutory provision relating to indefiniteness. 



Mlbid. 

49 A leading case is In re United Cigar Stores Co. of America (1934), 8 F. Supp. 
243 (N.Y. Dist. Ct.), aff'd (1934), 72 F. (2d) 673 (2nd Cir.). 

50Texas Co. v. Pensacola Maritime Corp. (1922), 279 F. 19 (5th Cir.). 

51 See, for example, In re Gloucester Municipal Election Petition 1900 (Tuffley 
Ward), [1901] 1 K.B. 683; and Percival Ltd. v. L.C.C. Asylums and Mental 
Deficiency Committee (1918), 87 LJ.K.B. 677; Waddams, footnote 45 supra, 
pp. 3-5. 

52 See, Duesenberg and King, footnote 1 supra, p. 4-47; White & Summers, foot- 
note 45 supra, p. 104. 

53\Vhite & Summers, footnote 45 supra, p. 104. 



183 

The third question is by far the most difficult and, of the questions 
here discussed, has attracted most of the litigation in the U.S. 54 This 
question raises the issue of the scope of the obligations undertaken by the 
parties. To what extent may a buyer abnormally increase or decrease his 
requirements? May he justify discontinuing any requirements? A parallel 
set of issues arises with respect to the supplier's obligation under an out- 
put contract. The abundant American case law admits of no easy generali- 
zation, but suggests two principal tests: namely, what did the parties 
reasonably contemplate at the time the contract was concluded, and was 
the party alleged to be in default acting in good faith? Thus a buyer 
starting a new business may be expected to have a substantial, perhaps even 
a dramatic, increase in his requirements; but he acts in bad faith if he 
increases his orders simply to take advantage of an unusual rise in the 
market price, or in anticipation of the supplier terminating the contract. 
Again, technological changes may justify reduced requirements, but not 
the availability of a cheaper substitute. The Anglo-Canadian authorities 
are few in number. 55 It has been suggested, 56 however, that they allow a 
greater margin of discretion to the buyer or seller in varying his output or 
requirements, as the case may be, at least where he has not acted in bad 
faith. 

Article 2 addresses itself to the problem in section 2-306(1), which 
provides as follows: 

( 1 ) A term which measures the quantity by the output of the seller 
or the requirements of the buyer means such actual output or 
requirements as may occur in good faith, except that no quantity 
unreasonably disproportionate to any stated estimate or in the 
absence of a stated estimate to any normal or otherwise compar- 
able prior output or requirements may be tendered or demanded. 

The extent to which this provision changes pre-Code law is not clear. The 
uniform requirement of good faith introduces no new element. The diffi- 
culty arises because of the importance attached in UCC 2-306(1) to any 
stated estimate of output or requirements in the contract or, in the absence 
of a stated estimate, to any "normal or otherwise comparable prior out- 
put or requirements". In such cases no "unreasonably disproportionate" 
quantity may be tendered or demanded. It seems that the draftsmen in- 
tended these benchmarks to be applied literally, and not merely to serve 
as constructional aids. 57 If this is correct, their effect could be very con- 
fining. Suppose a bakery agrees to purchase all of its sugar requirements 
from a sugar refinery. Because of a steep increase in the price of sugar, 
the demand for the bakery's products falls sharply and the bakery only 
orders one half of its previous requirements of sugar. The bakery might 
be held to be in breach, though acting in perfectly good faith and even 
though the contract did not stipulate a minimum or maximum quantity of 
sugar. The bakery would still face the complaint that its reduced require- 
ments were unreasonably disproportionate to its prior requirements. 

54 Compare, Duesenberg and King, footnote 1 supra, pp. 4-52 et seq.\ White & 

Summers, footnote 45 supra, pp. 104 et seq. 
55 Waddams, footnote 45 supra, pp. 5 et seq. 
56/ bid., pp. 12-13. 
57See, UCC 2-306, Comment 3; White & Summers, footnote 45 supra, p. 107. 



184 

In our view, a court should not be obliged to come to such a con- 
clusion. It has been suggested 58 that "unreasonably disproportionate" still 
allows for ample elasticity. This may be so, although it runs counter to 
the language of Comment 3 to section 2-306. We recommend that the 
revised Ontario Act make it clear that stated estimates and prior output 
or requirements figures should serve as guidelines, and not as mandatory 
rules, in determining the parties' intention. We think this change could 
be accomplished by adoption of the following language: 59 

An agreement that measures the quantity of goods to be bought or 
sold by the output of the seller or the requirements of the buyer 
means such reasonable quantity as may be required or supplied by 
the buyer or seller acting in good faith, having regard to any stated 
estimates, any previous output or requirements, and all the circum- 
stances of the case. 

(ii) Exclusive Dealings Contracts 

Exclusive dealings contracts frequently overlap with output and re- 
quirements contracts. To the extent that they do, it is not necessary to 
repeat what has already been said under the previous heading. The inter- 
related questions raised by exclusive dealings contracts concern the extent 
to which such contracts are supported by consideration, and the scope of 
the obligations undertaken by the parties. 

Since Cardozo J's well known decision in Wood v. Lucy, Lady Duff- 
Gordon™ it has generally been accepted by American courts that an ex- 
clusive agency agreement is enforceable because the agent impliedly under- 
takes to use his best efforts to promote the sale of the principal's goods, 
thereby furnishing consideration. The principle is now recognized in the 
Code. Section 2-306(2) provides: 

A lawful agreement by either the seller or the buyer for exclusive 
dealing in the kind of goods concerned imposes unless otherwise 
agreed an obligation by the seller to use best efforts to supply the 
goods and by the buyer to use best efforts to promote their sale. 

The requirement of a "lawful" agreement in line 1 is a reference to com- 
mon law and statutory restrictions that may apply to exclusive dealing 
agreements. It will be observed, too, that the subsection only addresses 
itself to the implied obligation undertaken by the recipient of the exclu- 
sive rights, and not to the consideration that supports the agreement. The 
two are, of course, interchangeable. 

The Anglo-Canadian position is less clear. In Warren v. Agdesh- 
man 61 an implied promise was found by the agent "not to decline reason- 
ably to introduce customers".. In Christopher v. Essig 62 an exclusive agency 



58 White & Summers, footnote 45 supra, p. 106. 

59See, Draft Bill, s. 5.4(1). 

60(1917), 118N.E. 214 (N.Y. Ct. App.). 

61(1922), 38 T.L.R. 588(K.B.). 

62[1948] W.N. 461 (K.B.). 



185 

for the sale of real property was held to imply a promise by the agent that 
he would use his best efforts to sell the property. On the other hand, in 
Tobias v. Dick and T. Eaton Co. 63 and, more recently, in Schroeder Music 
Publishing Co. v. Macaulay, 64 the courts refused to subscribe to any such 
general implication. 

In our view, in the absence of contrary indications, the general pre- 
sumption should be that the person receiving the exclusive benefit will 
use his best efforts, for otherwise the agreement does not make commercial 
sense. We therefore support the principle of UCC 2-306(2). However, 
the language of the subsection is a little too compressed, and we, therefore, 
recommend the adoption of the following provision: 

Where the buyer lawfully agrees to buy goods exclusively from the 
seller or the seller lawfully agrees to sell goods exclusively to the 
buyer, there is, unless the circumstances show a contrary intention, 
an obligation by the seller to use his best efforts to supply the goods 
and by the buyer to use his best efforts to promote their sale. 

This provision is contained in our Draft Bill. 65 

(d) CONTRACTS OF INDETERMINATE DURATION 66 

A contract for the supply and purchase of goods may envisage suc- 
cessive performances; for example, a contract to supply a factory with 
its requirements of fuel oil, or a contract to supply a supermarket with its 
requirements of a particular shelf item. It happens not infrequently that 
contracts of this nature fail to state their duration. In such cases, what 
inferences are to be drawn from silence? There are several possibilities. 
One is to imply a presumption of perpetual duration. Another is to imply 
a presumption of terminability at will, subject to the giving of reasonable 
notice. An intermediate solution is to imply a minimum period of duration, 
following which the contract would, as in the second case, be terminable 
on reasonable notice. The problem has been extensively litigated in the 
U.S., 67 with conflicting results. It has received much less judicial attention 
in England and Canada. 

The initial English response, as illustrated by Llanelly Ry. & Dock 
Co. v. London and North Western Railway Co., 68 was to imply a pre- 
sumption of perpetual duration. This extreme interpretation has yielded 



63[1937] 4 D.L.R. 546 (Man. K.B.). 

64[1974] 1 W.L.R. 1308 (H.L.). 

64i See, Draft Bill, s.5.4(2). 

66 See, also, Waddams, "Effect of Absent Time Provisions in Sales Contracts 
(UCC 2-309)", Research Paper No. II.9B; and Carnegie "Terminability of Con- 
tracts of Unspecified Duration" (1969), 85 L.Q.R. 392. 

67 .See, Buckner, "Termination by Principal of Distributorship Contract Contain- 
ing No Express Provision For Termination" (1968), 19 A.L.R. 3d 196; and 
Gellhorn, "Limitations on Contract Termination Rights-Franchise Cancella- 
tions", [1967] Duke LJ. 465. 

68 ( 1875), L.R. 7 E. and I. App. 550; compare, Coniagas Reduction Co. Ltd. v. 
Hydro-Electric Power Commission of Ont. (1928), 35 O.W.N. 89 discussed in 
(1930), 8 Can. Bar Rev. 153 (H.C.J.). 



186 

in later cases 69 to a presumption of terminability on notice. Presumably 
the latter, more moderate, interpretation would now also be applied in 
Ontario, for, as a learned commentator has reasoned, 70 a presumption of 
perpetual duration imposes "an excessively severe penalty for the misde- 
meanour of careless draftsmanship". It also ascribes to the parties what in 
most cases must be quite a fictitious view of their intention. 

The majority of American decisions 71 favour terminability at will, 
with or without the requirement of a reasonable period of notice, but some 
courts have implied a period of minimum duration before the contract 
can be terminated. 72 This latter construction appears to have influenced 
Article 2. Section 2-309(2) and (3) reads as follows: 

(2) Where the contract provides for successive performances 
but is indefinite in duration it is valid for a reasonable time but un- 
less otherwise agreed may be terminated at any time by either party. 

(3) Termination of a contract by one party except on the hap- 
pening of an agreed event requires that reasonable notification be 
received by the other party and an agreement dispensing with noti- 
fication is invalid if its operation would be unconscionable. 

As has been noted, 73 these provisions are both obscure and contradictory. 
Read literally, subsection (2) suggests two principles: (a) that the con- 
tract expires automatically after a reasonable period of operation unless 
it has been terminated sooner; and, (b) that, notwithstanding the require- 
ment of notice in subsection (3), the contract can be terminated "at any 
time". There has been very little judicial discussion 74 of these drafting 
infelicities, but it seems safe to assume that a literal reading was not in- 
tended. 

The Commission supports a presumption of terminability at will, 
coupled with a requirement of reasonable notice. There may be cases 
where the surrounding circumstances favour a construction of perpetual 
duration, but they must surely be rare. Our recommendation would not, of 
course, preclude a court from reaching such a result, but the initial pre- 
sumption would be in the opposite direction. While we do not deny its 
attractions, we have decided not to support a presumption of minimum 
duration. Our opposition to it is based in part on the novelty of such an 
approach in Anglo-Canadian law, and in part on our belief that such a 

69For example, Crediton Gas Co. v. Crediton U.D.C., [1928] 1 Ch. D. 447 
(C.A.); Martin Baker Aircraft Co. Ltd. v. Can. Flight Equipment Ltd., [1955] 
2 Q.B. 556; Nat. Bowling & Billiards Ltd. v. Double Diamond Bowling Supply 
Ltd. and Automatic Pinsetters Ltd. (1961), 27 D.L.R. (2d) 342 (B.C. S.C.). 
See also Chitty on Contracts, (24th ed., 1977), Vol. 1, para. 799, p. 798. 

70 Carnegie, footnote 66 supra, at p. 411. 

71 See, Buckner, footnote 67 supra, especially at pp. 233 et seq. 

IVbid., pp. 319 et seq. 

73 Waddams, footnote 66 supra, pp. 8-9. Compare, NYLRC Study ch. 5, footnote 
52, supra, p. (383). 

74 See, for example, Weilersbacher v. Pittsburgh Brewing Co. (1966), 218 A. 
2d 806 (Pa. S. Ct.)l Goldinger v. Boron Oil Co. (1974), 375 F. Supp. 400 
(D. Penn.); Superior Foods Inc. v. Harris-Teeter Super Markets Inc. (1975), 
217 S.E. 2d 566 (N.C. S.Ct.). None of these decisions in fact analyzes UCC 
2-309(2), although they purport to apply it. 



187 

presumption is not really necessary. The requirement of reasonable notice 
should be sufficient to protect the other party's interests in most cases, 
and should accomplish the same result as a period of minimum duration 
followed by a short period of notice. What is "reasonable notice" will, of 
course, depend on all the circumstances. A large initial investment by the 
supplier or buyer will call for a longer period of notice than cases where 
the investment is neglible, or where there are readily accessible and al- 
ternative sources of supply or demand. Other relevant factors have been 
canvassed in the abundant literature that now exists 75 on the question in 
the context of franchising agreements. 

Accordingly, the Commission recommends that, where a contract 
provides for successive performances but is silent as to duration, there 
should be a presumption that the contract is terminable at will, subject 
to a requirement of reasonable notice. There should not be a presumption 
of minimum duration. Our Draft Bill reflects these recommendations. 76 

Finally, there is the question whether the parties should be free to 
dispense with the requirement of notice of termination. It will be noted 
that UCC 2-309(3) permits a clause dispensing with notice, unless "its 
operation would be unconscionable". At first blush, this seems to say no 
more than that such a waiver is subject to the unconscionability provision 
in UCC 2-302 that governs all contractual provisions. However, this is 
not quite correct. There is a difference. Pursuant to UCC 2-302, the court 
must find the contract or the impugned clause to have been unconscion- 
able "at the time it was made"; under UCC 2-309(3), on the other hand, 
the court may enlarge its horizons and also consider the actual impact of 
the waiver clause as of the time of its operation. 77 The clause may have 
been quite reasonable when initially adopted, but may later acquire a 
potency not originally contemplated by the parties. The Commission is 
of the view that the parties should be free to agree to dispense with the 
requirement of notice of termination, provided that the operation of such 
an agreement would not be unconscionable. 

We have also considered whether the revised Act should go further, 
and shift the burden to the terminating party to satisfy the court that the 
clause dispensing with notice was not unconscionable. We have decided 
against this course of action because franchising and supply agreements 
differ too widely to admit of easy generalizations. We have also been per- 
suaded that it would be a futile gesture, since the terminating party could 
easily evade any provision shifting the onus by the simple expedient of 
agreeing to a short period of notice. To meet this objection, any provi- 
sion shifting the burden of proof would have to embrace all clauses that do 
not require "reasonable" notice. But even in such a case, there would still 
be the preliminary issue of whether the contractually required notice was 
reasonable. The aggrieved party would bear the onus of proving that the 
notice was unreasonable. In our view, it involves little additional effort on 



75 See, footnote 55 supra, and, also, Comment, "Franchise Distribution Agree- 
ments", [1969] Duke L.J. 959, and Vesely, "Franchising as a Form of 
Business Organization — Some Legal Problems" (1977-78), 2 C.B.LJ. 34. 

76See, Draft Bill, s. 5.7(2). 

77Compare, Duesenberg & King, footnote 1 supra, pp. 4-108 to 4-110. 



188 

the part of the aggrieved party to carry the full burden of proof of uncon- 
scionability. 

In conclusion, we recommend that a provision comparable to UCC 
2-309(3) be included in the revised Sale of Goods Act. Our Draft Bill 
contains such a provision. 78 

(e) OPTIONS AND COOPERATION RESPECTING PERFORMANCE 

UCC 2-311 provides: 

(1) An agreement for sale which is otherwise sufficiently defi- 
nite (subsection (3) of Section 2-204) to be a contract is not made 
invalid by the fact that it leaves particulars of performance to be 
specified by one of the parties. Any such specification must be made 
in good faith and within limits set by commercial reasonableness. 

(2) Unless otherwise agreed specifications relating to assort- 
ment of the goods are at the buyer's option and except as otherwise 
provided in subsections (l)(c) and (3) of Section 2-319 specifica- 
tions or arrangements relating to shipment are at the seller's option. 

(3) Where such specification would materially affect the other 
party's performance but is not seasonably made or where one party's 
cooperation is necessary to the agreed performance of the other but 
is not seasonably forthcoming, the other party in addition to all other 
remedies 

(a) is excused for any resulting delay in his own perform- 
ance; and 

(b) may also either proceed to perform in any reasonable 
manner or after the time for a material part of his own perform- 
ance treat the failure to specify or to cooperate as a breach by 
failure to deliver or accept the goods. 

The section has no counterpart in the Ontario Sale of Goods Act. 

Subsection (1) addresses itself to another aspect of the problem of 
indefiniteness. Like UCC 2-305, the section on price, it adopts the very 
commercial point of view that contracts of sale are not to be stigmatized 
as void for uncertainty because particulars of performance are to be 
specified by one of the parties; for example, the selection of lumber from 
among an agreed range of sizes where the total quantity has been fixed. 
Early American cases 79 regarded such contracts as too indefinite — at any 
rate where the contract was still executory — because there was no basis 
upon which the court could assess damages if the party in breach failed to 
make the selection. Later cases 80 rejected this approach and focused on 



78See, Draft Bill, s. 5.7(3). 

79For example, Wheeling Steel & Iron Co. v. Evans (1903), 55 A. 373 (Md. Ct. 
App.). See, further, Comment, "Specification and Apportionment Contracts: 
Common Law and Uniform Commercial Code" (1956), 23 U. Chi. L. Rev. 
499, 500 et seq., and (1937), 106 A.L.R. 1284. 

80See, Comment, (1956), 23 U. Chi. L. Rev. 499, 502 et seq. 



189 

the question whether or not the party in breach had assumed an obliga- 
tion, and not merely the power, to make the selection. This approach also 
appears to reflect prevailing Anglo-Canadian doctrine, as sanctioned by 
the House of Lords in Hillas & Co. Ltd. v. Arcos Ltd. 81 The concluding 
sentence of UCC 2-3 11(1) imposes a duty of good faith and commercial 
reasonableness on the party obliged to provide the specifications. This 
requirement, too, is found in our case law 82 and flows logically from the 
adoption of any general doctrine of good faith. 

Subsection (2) addresses itself to the occasional situation where the 
contract is silent with respect to the allocation of options involving assort- 
ment of goods and shipping arrangements. Apparently, its purpose is 83 
to reject a pre-Code rule, which has no modern Anglo-Canadian counter- 
part in the law of sales, but seemingly traces its origin to Coke. 84 The rule 
states that the option lies with the party "first under a duty to move". We 
agree with the Comment to the Code provision 85 that subsection (2) ac- 
cords better with the usual commercial interpretation applied to such 
circumstances. It should be emphasized that the subsection only applies 
in the absence of any contrary agreement between the parties, and agree- 
ment here, as in other cases of construction, includes usage of trade and 
course of dealing between the parties. 

Subsection (3) presents greater difficulties. It is well settled in our 
law 86 that, where there is a failure of cooperation, the innocent party is 
excused for any resulting delay in his own performance. Clause (a) is in 
accord with this common sense proposition. The difficulties arise because 
clause (b) also authorizes the innocent party "[to] proceed to perform in 
any reasonable manner". This power is not, apparently, supported by ex- 
isting Anglo-Canadian law, and is contrary to the weight of pre-Code 
American authority. 87 Two objections were raised at common law against 
the power of an innocent party to proceed unilaterally with performance. 
The first was that contracts that gave the party not at fault a power of 
selection or specification were too uncertain to be capable of enforcement. 
This objection has already been dealt with above, and is disposed of in 
UCC 2-311(1). The other, more substantial, objection was that the power 
conflicted with the breaching party's right to have damages assessed in the 
manner least onerous to him. We agree with a learned commentator 88 



81(1932), 14 T.L.R. 503, [1932] All E.R. 494, 38 Com. Cas. 23 (H.L.). Com- 
pare, Canada Egg Products Ltd. v. Can. Doughnut Co. Ltd., [1955] S.C.R. 
398, [1955] 3 D.L.R. 1. See, also, Burrows, "Contractual Co-operation and the 
Implied Term" (1968), 31 Mod. L. Rev. 390. 

82 As illustrated by the Arcos case, supra. We are not, of course, suggesting that 
there is a general doctrine of good faith in Anglo-Canadian law applicable to 
the performance of contractual obligations. 

S3See, UCC 2-311, Comment 2. 

84Co. Litt. 145a, cited in Williston on Contracts, (3rd ed., 1961), Vol. 11, s. 
1407, n. 4. 

85 Supra, footnote 83. 

86See, Benjamin's Sale of Goods (1974), para. 614. The leading case is Mackay 
v.Dick (1881), 6 A.C. 251 (H.L. (Sc.)). 

S7NYLRC Study, ch. 5, footnote 52, supra, pp. (667) to (669); Comment, 
footnote 79 supra, especially pp. 500 et seq. 

88 Comment, footnote 79 supra, at pp. 507 et seq. 



190 

that the Code adequately protects the party in breach : first, by the require- 
ment in UCC 2-311 (3) (b) that the aggrieved party, if he elects to pro- 
ceed, must proceed in "any reasonable manner"; and, secondly, by the 
general obligation of good faith that binds all contracting parties. 

We believe, therefore, that these objections have been answered 
satisfactorily. What is not so clear is whether UCC 2-31 1 (3) (b) entitles 
the aggrieved party to proceed, even though the defaulting party has mani- 
fested a clear intention to repudiate the contract. It is reasonable to as- 
sume that, in such a case, the draftsman intended the Code's provisions 
on repudiation 89 to apply, and we think this should be made clear. Sub- 
ject to this proviso, we recommend adoption of UCC 2-311 in the revised 
Ontario Act, and our Draft Bill contains a provision to this effect. 90 

RECOMMENDATIONS 

The Commission makes the following recommendations: 

1. The revised Act should explicity recognize course of dealing be- 
tween the parties and usage of trade as constructional tools and 
sources of implied terms of the agreement between the parties. 
Accordingly, a provision similar to UCC 1-205(3) should be 
incorporated in the revised Sale of Goods Act. 

2. The definition of "course of dealing" should be based on UCC 
1-205(1). It should emphasize the essential ingredient of regular 
dealings between the parties and should adopt an objective test 
with respect to whether agreement on missing terms can be im- 
plied from the parties' previous dealings. Accordingly "course of 
dealing" should be defined in the revised Act to mean "previous 
conduct between the parties to a transaction that may fairly be 
regarded as establishing a common basis of understanding for 
interpreting their expressions and other conduct". 

3. The common law definition of "usage of trade", which requires 
that, to be admissible in evidence, a usage must be, among other 
things, certain, universally accepted and not inconsistent with 
the express or implied terms of the contract, should not be ad- 
opted. Rather, a definition of the term similar to that contained 
in UCC 1-205(2) should be included in the revised Act. Specifi- 
cally, "usage of trade" should be defined as "any reasonable 
practice or method of dealing that is observed in a place, voca- 
tion or trade with such regularity as to justify an expectation that 
it will be observed with respect to a transaction in question". 

4. The revised Act should also incorporate provisions similar to 
those contained in UCC 1-205 dealing with the relationship of 
course of dealing and usages of trade to each other and to the 
express terms of the agreement. 



89See, UCC 2-610, 2-611, 2-703, 2-704. 
90See, Draft Bill, s. 5.9. 



191 

5. Where the parties have intended to enter into a binding con- 
tract of sale and there is a reasonably certain basis for giving an 
appropriate remedy, the contract should not fail by reason of the 
absence of one or more terms even where they have been left 
open for future agreement. Accordingly, a provision similar to 
UCC 2-204(3) should be included in the revised Act. 

6. A section similar to UCC 2-305 dealing with uncertainty as to 
price should, subject to minor modifications dealing with the fix- 
ing of the price by a third person, and the remedies of the in- 
nocent party where the price fails to be fixed through the fault 
of one of the parties, be substituted for sections 9 and 10 of 
The Sale of Goods Act. 

7. There should be inserted in the revised Act a provision, similar 
to UCC 2-306(1), dealing with the construction of output and 
requirements contracts. Unlike UCC 2-306(1), however, the 
provision in the revised Act should provide that stated estimates 
and prior output or requirements figures should serve as guide- 
lines in determining the parties' intention concerning their obliga- 
tions under the contract, and not as mandatory rules. 

8. The revised Act should also contain a provision, similar to UCC 
2-306(2), dealing with the construction of exclusive dealing con- 
tracts. This provision should contain a presumption that the seller 
will use his best efforts to supply, and the buyer his best efforts to 
sell, the goods. 

9. It is unnecessary to provide explicitly that output and require- 
ments contracts and exclusive dealing contracts are not unen- 
forceable by reason of indefiniteness or lack of consideration. 

10. Where a contract provides for successive performances but is 
silent as to duration, there should be a presumption that the con- 
tract is terminable at will, subject to a requirement of reason- 
able notice. There should be no presumption of minimum dura- 
tion. 

11. As in UCC 2-309(3), the parties to a contract of the type re- 
ferred to in recommendation No. 10, supra, should be free to 
agree to dispense with the requirement of notice of termination, 
provided that the operation of such an agreement would not be 
unconscionable. 

12. A provision, similar to UCC 2-311, dealing with options and 
cooperation respecting performance, should be included in the 
revised Act, subject to an amendment to subsection (3)(b) to 
make it clear that the subsection is to be read subject to the pro- 
visions in the revised Act concerning repudiation. 



CHAPTER 9 



THE SELLER'S IMPLIED WARRANTIES 
(CONDITIONS) OF TITLE, DESCRIPTION 
AND QUALITY AND THE EFFECTIVENESS 
OF DISCLAIMER CLAUSES 



In every contract of sale, unless otherwise agreed, certain terms re- 
lating to the seller's obligations with respect to the title, description and 
quality of the goods are implied by virtue of sections 13 to 16 of The Sale 
of Goods Act. In our Report on Consumer Warranties and Guarantees, 1 
we expressed the view that, on the whole, these provisions have worked 
well from the consumer's point of view. It seemed to the Commission that 
the major difficulties arose, not from any defects from which they suffer, 
as undoubtedly they do to some extent, but from the seller's disposition to 
exclude or restrict the implied terms so as to deprive the buyer of the bene- 
fit of these statutory provisions. However, the Warranties Report con- 
cluded that the existing provisions were in need of some clarification and 
modernization, and we made a substantial number of recommendations 2 
with this object in view. 

We have reached substantially the same conclusion both with respect 
to the operation of the implied obligations in non-consumer sales, and 
with respect to the desirability of adopting similar amendments in a 
sales Act of general application. Since the publication of the Warranties 
Report, the U.K. Parliament has adopted the Supply of Goods (Implied 
Terms) Act 1973? In considering what changes to recommend in the 
revised Ontario Act, we have had the advantage of being able to study 
the provisions of this Act, in conjunction with the corresponding pro- 
visions of Article 2 of the Uniform Commercial Code. The changes that 
we recommend are considered below. 

1. Title, Quiet Possession, and Freedom From Encumbrances 

Section 13 of the Ontario Sale of Goods Act imposes upon a seller 
three implied title obligations. Section 13 provides as follows: 

13. In a contract of sale, unless the circumstances of the contract 
are such as to show a different intention, there is, 

(a) an implied condition on the part of the seller that in the 
case of a sale he has a right to sell the goods, and that in 
the case of an agreement to sell he will have a right to sell 
the goods at the time when the property is to pass; 

(b) an implied warranty that the buyer will have and enjoy 
quiet possession of the goods; and 



JOntario Law Reform Commission, Report on Consumer Warranties and Guar- 
antees in the Sale of Goods (1972), pp. 32-33. 
2 lbid., pp. 32 et seq. 
31973, c. 13 (U.K.). 

[193] 



194 

(c) an implied warranty that the goods will be free from any 
charge or encumbrance in favour of any third party, not 
declared or known to the buyer before or at the time when 
the contract is made. 

We now set out the corresponding provisions in section 1 2 of the U.K. Act, 
as amended by the Act of 1973, and in UCC 2-312. Section 12 of the 
amended U.K. Act provides as follows: 

12.(1) In every contract of sale, other than one to which subsec- 
tion (2) of this section applies, there is — 

(a) an implied condition on the part of the seller that in the 
case of a sale, he has a right to sell the goods, and in the 
case of an agreement to sell, he will have a right to sell the 
goods at the time when the property is to pass; and 

(b) an implied warranty that the goods are free, and will re- 
main free until the time when the property is to pass, from 
any charge or encumbrance not disclosed or known to the 
buyer before the contract is made and that the buyer will 
enjoy quiet possession of the goods except so far as it may 
be disturbed by the owner or other person entitled to the 
benefit of any charge or encumbrance so disclosed or 
known. 

(2) In a contract of sale, in the case of which there appears 
from the contract or is to be inferred from the circumstances of the 
contract an intention that the seller should transfer only such title as 
he or a third person may have, there is — 

(a) an implied warranty that all charges or encumbrances 
known to the seller and not known to the buyer have been 
disclosed to the buyer before the contract is made; and 

(b) an implied warranty that neither — 

(i) the seller; nor 
(ii) in a case where the parties to the contract intend that 

the seller should transfer only such title as a third 

person may have, that person; nor 

(iii) anyone claiming through or under the seller or that 
third person otherwise than under a charge or en- 
cumbrance disclosed or known to the buyer before 
the contract is made; 

will disturb the buyer's quiet possession of the goods. 

Section 2-312 of the Uniform Commercial Code reads as follows: 

2-312.(1) Subject to subsection (2) there is in a contract for sale 
a warranty by the seller that 

(a) the title conveyed shall be good, and its transfer rightful; 
and 

(b) the goods shall be delivered free from any security interest 
or other lien or encumbrance of which the buyer at the 
time of contracting has no knowledge. 



195 

(2) A warranty under subsection (1) will be excluded or modi- 
fied only by specific language or by circumstances which give the 
buyer reason to know that the person selling does not claim title in 
himself or that he is purporting to sell only such right or title as he 
or a third person may have. 

(3) Unless otherwise agreed a seller who is a merchant regu- 
larly dealing in goods of the kind warrants that the goods shall be 
delivered free of the rightful claim of any third person by way of 
infringement or the like but a buyer who furnishes specifications to 
the seller must hold the seller harmless against any such claim which 
arises out of compliance with the specifications. 

In our view, the conditions and warranties implied by section 13 of 
the Ontario Sale of Goods Act are generally satisfactory. However, the 
section gives rise to a number of difficulties, and raises several issues of 
policy. We recommend that the terms implied by section 13 should be 
retained in the revised Act, subject to appropriate changes and modifica- 
tions to resolve these matters. We turn now to a discussion of the prob- 
lems raised by section 13. 

(a) THE IMPLIED CONDITION OF TITLE: SECTION 13(a) 

It seems anomalous that the Act should characterize the implied 
term with respect to the seller's title as a condition, whereas the implied 
terms of quiet possession and freedom from encumbrances are only treated 
as warranties. The assumption appears to be that a breach of the latter 
terms will be substantially less prejudicial to the buyer than a breach in- 
volving his title. This may be true in many cases, but it is by no means 
universally true. We need not pursue this point, because the elimination 
of the distinction between warranties and conditions, which we have pre- 
viously recommended, 4 and the adoption of a new remedial regime based 
on the concept of substantial breach, will result automatically in the uni- 
form treatment of the three implied terms. 

Another difficulty about subsection (a) is that it does not provide 
adequate protection in the case of a conditional sale in which the buyer 
obtains immediate possession of the goods, but in which transfer of title 
is deferred to a future date. A literal application of the subsection would 
lead to the conclusion that, until he has discharged all his obligations 
under the security agreement, the buyer is not entitled to complain about 
a defect in the seller's title. This would be a manifestly unsatisfactory re- 
sult. As was noted in our Warranties Report, 5 the English courts have 
bridged this gap in the case of hire-purchase agreements by implying a 
term at common law that the owner has title at the time he delivers the 
goods to the hirer. 6 Although the point does not appear to have been 



4 Supra, ch. 6, sec. B. 

5 Supra, footnote 1, p. 33. 

^Karflex Ltd. v. Poole, [1933] 2 K.B. 251; Warman v. Southern Counties Car 
Finance Corp. Ltd., [1949] 2 K.B. 576. Quaere whether these cases remain 
good law even though the successive U.K. Hire Purchase Acts and, now, the 
Supply of Goods {Implied Terms) Act 1973, c. 13 (U.K.), s. 8 as amended, 
implied or imply statutory terms as to the owner's title? 



196 

raised directly, 7 presumably the same reasoning would be applied to a 
conditional sale agreement. An alternative, and, in our view, preferable, 
approach would be for the court to find that the beneficial property in the 
goods is intended to pass to the buyer upon delivery of the goods, and that 
the seller's title is only by way of security. This is the theory clearly adopted 
in Articles 2 and 9 of the Code, and in The Personal Property Security 
Act. We have also adopted it in the Draft Bill. 8 However, it may be desir- 
able to spell out specifically the implications of this characterization in the 
context of the seller's implied warranty of title. Accordingly, we recom- 
mend the insertion of a new provision in the revised Act to the effect that, 
where the seller retains a security interest in the goods, his implied war- 
ranty of title takes effect when the goods are delivered to the buyer. 9 

A more controversial point concerns the requirement in subsection 
(a), that the seller must have a "right" to sell the goods; a "power" to 
pass a good title will not suffice to satisfy the condition. Suppose a dealer 
who has pledged his inventory sells parts of it in violation of the terms 
of the security agreement. He has no "right" to sell the goods, but section 
30(1) of The Personal Property Security Act 10 gives him a "power" to 
pass a better title than he himself has. In these circumstances, should the 
seller be able to resist a claim by the buyer under subsection (a)? Our 
view is that he should not. We consider that provisions such as section 30 
of The Personal Property Security Act are intended to protect innocent 
buyers, and not to provide a shield for erring sellers. We would adopt the 
same position whether or not the seller has acted in good faith, on the 
ground that the buyer has not bargained for a lawsuit. We do not, there- 
fore, recommend any change in this aspect of subsection (a). 

(b) IMPLIED WARRANTY OF QUIET POSSESSION 

An important question concerning the scope of the implied warranty 
of quiet possession arose in Microbeads A.G. v. Vinhurst Road Markings 
Ltd. 11 This case concerned, inter alia, a counterclaim by a buyer of goods 
for breach of the implied warranty of quiet possession. The counterclaim 
related to an action that had been brought against the buyer by a patentee 
for infringement of patent rights that had crystallized after delivery of the 
goods to the buyer. The English Court of Appeal held that the warranty 
of quiet possession does not operate to protect a buyer only in respect of 
acts committed by the seller, or otherwise arising, before the goods were 
delivered to the buyer. The Court held that the warranty of quiet posses- 
sion had equal application to acts leading to a lawful interference with 
the buyer's quiet possession that arose after this date. The New South 



7 It was not raised, for example, in Shan v. Empire Motors Ltd. (1956), 3 
D.L.R. (2d) 53 (B.C.C.A.). 
8See, for example, Draft Bill, s. 6.1(2) (b). 
9See, Draft Bill, s. 5.12(3). 
10R.S.O. 1970, c. 344 as am. Section 30(1) provides as follows: 

30.(1) A purchaser of goods from a seller who sells the goods in the 
ordinary course of business takes them free from any security interest 
therein given by his seller even though it is perfected and the purchaser 
actually knows of it. 
H[1975] 1 W.L.R. 218, [1975] 1 All E.R. 529 (C.A.). 



197 

Wales Working Paper on the Sale of Goods 12 apparently takes the posi- 
tion that this decision imposes too heavy a burden on the seller. The Work- 
ing Paper has recommended an amendment 13 to the New South Wales 
Sale of Goods Act to restrict the seller's liability to lawful claims existing 
at the time of sale or delivery of the goods. We appreciate the difficult 
position in which the Court's interpretation of the warranty of quiet pos- 
session in the Microbeads case could place the seller. But we agree with 
Lord Denning 14 that, as between two innocent parties (assuming that the 
seller is, in fact, innocent) it is a just result that the seller should absorb 
any loss because, "after all, he sold the goods". It seems to us that the 
seller's position in this case is no different than in any other case in which 
the goods suffer from a hidden defect of which the seller was not aware, 
and which he could not have discovered through the exercise of reason- 
able care. We do not, therefore, recommend any change in subsection (b). 

We do not, however, wish to be misunderstood. The Microbeads 
case involved an unusual set of facts, in which the third party had at least 
an inchoate claim at the time the goods were delivered to the buyer. This 
case does not go so far as to hold that any post-delivery interference with 
the buyer's possession (for example, an embargo on the possession of fire- 
arms) will involve a breach of the warranty of quiet possession. In parti- 
cular fact situations, it may well be that this question will be subject to 
future judicial development. 

(c) IMPLIED WARRANTY OF FREEDOM FROM ENCUMBRANCES 

We deal here with three questions. The first is whether, having re- 
gard to the implied warranty of quiet possession, subsection (c) is needed 
at all. The second question involves the meaning of the words "charge" 
or "encumbrance", as these words appear in section 13(c). The third 
question we discuss concerns the point of time from which the implied 
warranty of freedom from encumbrances begins to run. 

We now turn to the first question: namely, whether subsection (c) 
is needed at all, given the fact that it is difficult to envisage undisclosed 
charges or encumbrances against the goods that will not also, sooner or 
later, involve an interference with the buyer's quiet possession. Although 
this may be true, the subsection does no harm, and may still serve a useful 
residual purpose. In our opinion, therefore, it should be retained. 

The second question, as we have noted, involves the meaning of 
"charge" and "encumbrance" as these words appear in section 13(c). 
These terms are not defined in the Act, but presumably Chalmers meant 
them to carry the same meaning as they carry in land law from where, it 
has been surmised, 15 he borrowed the concept of freedom from encum- 
brances. The absence of a definition does not appear to have given rise to 
difficulties in practice, and we do not suggest that one should be adopted 

J2Law Reform Commission, New South Wales, Working Paper on the Sale of 

Goods (1975), para. 12.10. 
Wbid., and New South Wales Draft Bill, s. 20E(4). 
14 [1975] 1 W.L.R. 218, at p. 223, [1975] 1 All E.R. 529, at p. 533. 
^Compare, Benjamin's Sale of Goods (1974), para. 277, n. 82. 



198 

now. We recommend, however, the addition of the term "security inter- 
est", which also appears in UCC 2-312(1) (b), and we do so for two 
reasons. The first reason is that the term is a familiar one to commercial 
lawyers, and its addition will resolve any lingering doubts with respect to 
the applicability of subsection (c) to consensual in rem rights against the 
goods. The second reason is that it will help to emphasize, once again, that 
a prior seller's reservation of title under an instalment sale is to be clas- 
sified as a security interest, and therefore as falling within subsection (c). 

The third question is concerned with the point in time from which the 
implied warranty of freedom from encumbrances begins to run. Subsec- 
tion (c) is ambiguous in this respect. The subsection refers to an implied 
warranty that the goods "will be free" from any charge or encumbrance. 
The use of the future tense suggests, at any rate, that the implied war- 
ranty begins to run at some point subsequent to the formation of the con- 
tract of sale. Section 12(1 )(b) of the amended U.K. Act now provides 
that there is an implied warranty "that the goods are free, and will remain 
free until the time when the property is to pass" from any undisclosed 
charge or encumbrance. This clearly changes the prior law. The use of the 
present tense, "are free", indicates that the warranty begins to run immedi- 
ately. This, as Benjamin points out, 16 could lead to some curious results, 
since the goods may be unascertained, in the ownership of some third 
party, or even not in existence at the time of the agreement to sell. We do 
not, therefore, recommend adoption of the U.K. amendment. We prefer, 
instead, the formulation in UCC 2-312(1) (b) that the goods "shall be 
delivered" free from any security interest or the like and recommend the 
adoption of a similar provision in the revised Act. 17 This formulation 
captures accurately the interests that the warranty of freedom from en- 
cumbrances seeks to protect. 

(d) IMPLIED WARRANTY OF ABSENCE OF INFRINGEMENTS 

UCC 2-312(3), dealing with questions of patent infringement and the 
like, has no counterpart in section 13 of the Ontario Act or in section 12 
of the amended U.K. Act. As will have been noted, the Code provision 
addresses itself to the type of problem that arose in the Microbeads case. 
UCC 2-312(3) implies a warranty on the part of a "merchant regularly 
dealing in goods of the kind" that the goods will be delivered free of the 
rightful claim of any third person "by way of infringement or the like". 18 
The section does not deem a private seller to warrant the goods free of 
patent infringement or the like. The Comment to the Code provision 19 
justifies this distinction on the ground that, when the goods are part of the 
seller's normal stock and sold in his normal course of business, it is his 
duty to see that no claim of infringement of a patent or trademark by a 
third party will mar the buyer's title; a sale by a person other than a dealer, 
on the other hand, raises no implication of such a warranty. There is some 

16/fc/U, para. 277, p. 140. 

"See, Draft Bill, s. 5.12(1 )(b). 

iSThe draft UNCITRAL Convention (1977 version), Art. 25(1), contains a 

provision still more favourable to the seller. 
i9See, UCC 2-312, Comment 3. 



199 

force in this reasoning, but it could just as easily be applied to other com- 
ponents of the implied warranty of title. Since it has not been so applied, 
and since the problem is apparently one of first impression in Ontario, 20 
we do not at this time recommend that the revised Act should contain a 
special provision relating to patent infringements and the like and restricted 
to merchant sellers. Claims of this type will, therefore, regardless of the 
character of the seller, continue to be governed by the waranty of quiet 
possession as well as, in appropriate circumstances, by the warranties of 
title and freedom from encumbrances. 

(e) seller's right to cure defective title and buyer's right 

TO RECOVER PAYMENTS ON RESCISSION FOR BREACH OF WAR- 
RANTY OF TITLE 

It will be convenient to postpone discussion of these issues to chap- 
ter 17, which deals with buyer's remedies. 

(f) DISCLAIMER OF TITLE OBLIGATIONS IMPLIED BY SECTION 13 

Before the adoption of the amendments to the U.K. Act in 1973, 
there was controversy among academic writers 21 with respect to whether a 
seller could successfully exclude his title obligations under section 12 of 
the U.K. Act, the equivalent of section 13 of the Ontario Act. Those who 
argued that he could not, pointed to the definition of contract of sale in the 
Act. They reasoned that a person who, with the one hand, agrees to trans- 
fer the general property in the goods cannot negate his undertaking to do 
so with the other. Other scholars pointed to the opening words of section 
12, as well as to the history of the implied condition of title at common 
law. They argued that Parliament clearly contemplated the possibility 
that the implied obligation could be excluded, whether by force of circum- 
stances or because of an express disclaimer. Whoever was right, it was 



20 The Patents Act, R.S.C. 1970, c. P-4, provides that any person who infringes 
a patent is liable to the patentee in damages (s. 57), and that an injunction 
may issue to enjoin "further use, manufacture or sale" of the infringing goods 
(s. 59). The Act does not distinguish between different types of infringers; nor 
does it define infringement. However, an authoritative Canadian text defines 
infringement as any act that interferes with the full enjoyment of the monopoly 
granted to the patentee if done without his consent: Fox, Canadian Patent 
Law and Practice, (4th ed., 1969), p. 349. Infringement may occur through the 
manufacture, use, or, it would appear, mere possession of the patented article, 
where there is present the intention of user to the detriment of the patentee. 
An intention to infringe is not material; nor need it be shown that the infringer 
has derived any pecuniary benefit from his infringement: Fox, supra, pp. 
381-84. From the aforegoing principles, it will be seen that the buyer in a pri- 
vate purchase runs a considerable risk of being sued successfully if the goods 
infringe a third party's patent, and that the implied warranty of quiet posses- 
sion serves a necessary purpose to protect him against such a contingency. 

21 See, for example, Hudson, "The Condition as to Title in Sale of Goods" 
(1957), 20 Mod. L. Rev. 236; Hudson, "The Exclusion of Section 12(1) of 
the Sale of Goods Act" (1961), 24 Mod. L. Rev. 690; Cheshire & Fifoot, The 
Law of Contract (5th ed., 1960), p. 136; Reynolds, "Warranty, Condition and 
Fundamental Term" (1963), 79 L.Q.R. 534, 542; Diamond, "Law Reform 
Committee: Twelfth Report on the Transfer of Title to Chattels" (1966), 29 
Mod. L. Rev. 413. 



200 

clearly desirable that the position should be clarified. The English and 
Scottish Law Commissions, in their First Report on Exemption Clauses 
in Contracts, 22 thought that the gateway, provided by the opening words of 
section 12 23 and the general provisions in section 55 of the U.K. Act 
dealing with exclusion of the implied terms and conditions, clearly per- 
mitted the disclaimer of implied obligations, and, indeed, that they were 
too widely drawn. The Law Commissions saw no justification for exclud- 
ing or varying the implied condition and warranties imposed by section 12, 
"save where it is clear that the seller is purporting to sell only a limited 
title". 24 Even in transactions involving limited titles, the Commissions were 
of the opinion that the seller should not be allowed to exclude entirely the 
warranties of quiet possession and freedom from encumbrances. The Com- 
missions' recommendations were implemented in the U.K. Supply of Goods 
(Implied Terms) Act 1973 by the addition of subsection (2) to section 
12 of the Sale of Goods Act, and by the insertion of a new subsection (3) 
in section 55 of the Act. 25 The former provision has already been quoted; 
the latter avoids disclaimer clauses involving the seller's obligations under 
section 12. 

We recommend the inclusion in the revised Ontario Act of a provision 
comparable to section 12(2) of the U.K. Act. 26 We do not, however, 
favour the statutory entrenchment of the seller's title obligations; accord- 
ingly, we recommend that the revised Act should not adopt a provision, 
similar to section 55(3) of the U.K. Act, prohibiting the disclaimer of the 
seller's implied title obligations under section 1 3 of the existing Act. As will 
be seen hereafter, in non-consumer sales our general position is that dis- 
claimer clauses should be permitted to exclude or vary the seller's implied 
warranties, subject to an overriding test of unconscionability. We see no 
justification for making an exception to this rule in the case of the seller's 
title obligations. In any event, it should be noted that the recommendations 
of the English and Scottish Law Commissions are not as far reaching as 
may appear at first sight. It is true that section 55(3) of the U.K. Act 
applies equally to sections 12(1) and (2) of that Act. The Law Commis- 
sions' recommendations, however, accepted the seller's right to exclude 
his warranty of title where "it is clear" that he is only purporting to sell a 
limited title, and this right is recognized, although not in identical langu- 



22Law Com. No. 24, Scot. Law Com. No. 12, Exemption Clauses in Contracts, 
First Report: Amendments to the Sale of Goods Act 1893 (1969), para. 17. 

23 Section 13 of the Ontario Sale of Goods Act. The words are, "unless the cir- 
cumstances of the contract are such as to show a different intention". 

2 *Supra, footnote 22. The Report does not explain the meaning of "when it is 
clear". Presumably a disclaimer clause in a standard form agreement would 
not meet the test; it would be otherwise if, to the knowledge of the buyer, the 
seller were a trustee in bankruptcy, a sheriff, or other person acting in a 
special capacity in disposing of the goods. Note, too, that the actual language 
of section 12(2) does not literally implement the Commissions' recommenda- 
tion, since it contains no requirement that it must be "clear" that the seller is 
only offering a limited title. The test is, rather, whether an intention "appears" 
from the contract or is to be "inferred" from the circumstances that the seller 
is only obligated to transfer a limited title. 

25S. 55(3) has now been repealed and re-enacted in the Unfair Contract Terms 
Act 1977, c. 50 (U.K.), section 6(l)(a). 

26See, Draft Bill, s. 5.12(2) (b). 



201 

age, 27 in the revised version of section 12(1). Accordingly, in the circum- 
stances, it is only the seller's residual obligations under section 12(2) of 
the amended U.K. Act that cannot be excluded. The differences between 
our recommendations and those now implemented in the United Kingdom 
are relatively modest, and encompass primarily the excludability of the 
provisions in section 12(2). As we have stated, the issue of excludability 
of title obligations should be resolved by the test of unconscionability. 
Applying this test, it is difficult to conceive of situations in which the 
seller could justify the exclusion of the limited obligations under section 
12(2). If, however, he can make out a persuasive case, he should not, in 
our view, be denied the opportunity to do so. No more so would we de- 
prive the buyer of the possibility of showing that the seller's purported 
exclusion of his obligations under the Ontario equivalent of section 12(1) 
was unconscionable, a preclusion that appears to result from a literal 
reading of the U.K. provisions. 

2. The Implied Condition of Description 

Section 14 of The Sale of Goods Act provides as follows: 

14. Where there is a contract for the sale of goods by description, 
there is an implied condition that the goods will correspond with the 
description, and, if the sale is by sample as well as by description, it 
is not sufficient that the bulk of the goods corresponds with the sample 
if the goods do not also correspond with the description. 

The corresponding provision in Article 2 of the Uniform Commercial 
Code, section 2-313(1), reads as follows: 

2-313.(1) Express warranties by the seller are created as follows: 

(a) Any affirmation of fact or promise made by the seller to 
the buyer which relates to the goods and becomes part of 
the basis of the bargain creates an express warranty that 
the goods shall conform to the affirmation or promise. 

(b) Any description of the goods which is made part of the 
basis of the bargain creates an express warranty that the 
goods shall conform to the description. 

(c) Any sample or model which is made part of the basis of 
the bargain creates an express warranty that the whole of 
the goods shall conform to the sample or model. 

The role of the concept of description is not limited to section 14. The term 
is also used in other sections of the Act, and its proper role and meaning 
are therefore of wider importance. For the moment, however, it will be 
convenient to confine our attention to this section. 

Section 14 raises a number of real or apparent difficulties. First, it 
seems anomalous to describe the obligation as an implied condition when, 
as is usually the case, the description of the goods forms an express term 
of the contract. This raises the basic question whether section 14 should 
be retained at all in the revised Act. Secondly, there may still be some 

27 See, supra, footnote 24. 



202 

doubt whether a sale in a supermarket or other type of self-service store 
constitutes a sale "by description". Thirdly, the extent to which a seller is 
deemed to adopt labels and other descriptive matter, attached to or ac- 
companying the goods, that originate not from him but from some other 
person such as the manufacturer or distributor, appears to be unsettled. 

(a) ANOMALY AND RETENTION 

The English and Scottish Law Commissions, in their First Report on 
Exemption Clauses in Contracts, admitted the first incongruity 28 but felt 
it was harmless and served the useful purpose of making it clear that the 
term amounts to a condition or essential term of the contract, and not a 
mere warranty. These Commissions, therefore, recommended no change 
in the section from this point of view. 

One member of our Research Team has suggested that this anomaly 
should be rectified by deleting the section altogether. 29 Other members 
of the Research Team support this position, albeit on different grounds. 
Two principal points have been made to us. The first is that section 14 
is tautological, and that it is not obvious why the Act should single out 
one type of express term for special attention. The second, and more im- 
portant, point is that section 14 is grounded upon the basic but, for war- 
ranty purposes, now irrelevant, distinction that was drawn in the 19th 
century between a sale of specific goods and a sale of future or unascer- 
tained goods. A sale by description was usually associated with a sale of 
the latter type. It has, however, been clear, at least since the decision of 
the Privy Council in Grant v. Australian Knitting Mills, 3 ® that a sale of 
specific goods can also be a sale by description. So far as the U.K. is 
concerned, the distinction between a sale of specific and other goods has 
been further eroded by the repeal of part of section 11(1) (c) of the 
U.K. Act. 31 As will be seen, the effect of other recommendations in this 
Report is to eliminate any remaining distinctions between a sale of specific 
goods and a sale of future or unascertained goods. Hence, it has been 
argued, there is no longer any need for a provision similar to section 14. 

We are not completely persuaded by either line of reasoning. Since 
we have earlier recommended the elimination of the distinction between 
warranties and conditions, the office envisaged by the Law Commissions 
for section 14 will obviously disappear. On the other hand, we are not sat- 
isfied that section 14 is of only historical interest. It does seem to us use- 
ful that the revised Act should continue the thrust of section 14, and 
should make it clear, as it is made clear in UCC 2-313(1) (b), that a 
description of the goods creates an express warranty that the goods con- 

2 %Supra, footnote 22, para. 22. 

29See, Waddams, "Implied Conditions and Warranties in The Sale of Goods Act, 
sections 13 to 16", Research Paper No. III. 3, p. 13. 

30[1936] A.C. 85 (P.C.). 

3!That is, that part of s. 11(1) (c) depriving the buyer, in a contract for the sale 
of specific goods the property in which had passed to the buyer, of the right 
to reject the goods for breach of condition. See the Misrepresentation Act 
1967, c. 7 (U.K.), s. 4(1). Section ll(l)(c) corresponds to s. 12(3) of the 
Ontario Act; the U.K. amendment has not been copied in Ontario. 



203 

form to the description. Such a description would constitute a part of the 
contract, without the buyer having to show any particular reliance on the 
descriptive terms or, if one prefers to use the language of offer and accep- 
tance, that he intended to accept the offer implicit in the seller's terms. 
However, some minor changes to section 14 would appear to us to be 
desirable, and we recommend the insertion of the following provision in 
the revised Act: 32 

Without restricting the generality of section 5.10, 33 

(a) in a contract of sale there is an express warranty that the 
goods to be supplied will conform to their description in 
the contract; and 

(b) in a contract of sale by sample or model there is an express 
warranty that the goods to be supplied will conform to 
their description in the contract and to the sample or model 
in all respects including quality. 

It will be noted that subsection (b) deals with a sale by sample or 
model and provides, not only that the goods supplied must conform to the 
description in the contract, but also that they must conform to the sample 
or model. This latter aspect of the draft subsection incorporates a provision 
now contained in section 16(2)(a) of the Ontario Sale of Goods Act. As 
is mentioned below in our discussion of sale by sample, 34 we have con- 
sidered it convenient to incorporate this provision in subsection (b) of 
our provision dealing with the warranty of description. 

(b) SALES IN SELF-SERVICE STORES 

The second question that arises in connection with the implied condi- 
tion of description concerns sales in self-service stores. As noted, there 
may still be some doubt as to whether such a sale is a sale "by description". 
The English and Scottish Law Commissions recommended 35 that this 
problem should be resolved by adding a new subsection to section 13 of 
the U.K. Sale of Goods Act, the provision equivalent to section 14 of the 
Ontario Act. This has now been done. The new clause provides as follows: 

13.(2) A sale of goods shall not be prevented from being a sale 
by description by reason only that, being exposed for sale or hire, 
they are selected by the buyer. 

A similar, but enlarged, recommendation appears in the New South Wales 
Working Paper. 36 The problem to which the U.K. amendment is addressed 
arises because of earlier doubts as to whether the seller in a self-service 
store warrants the merchantable quality of his goods. These doubts were 
raised in part because section 15.2 of the existing Act only applies where 
goods are bought "by description". Later in this chapter, we recommend 

32See, Draft Bill, s. 5.11(1). 

33 The opening line is a reference to the section of the Draft Bill defining express 

warranty. 
34 See, infra, this ch., sec. 4. 
SSSupra, footnote 22, para. 24. 
^Supra, footnote 12, para. 10.11, and New South Wales Draft Bill, s. 16(1). 



204 

deletion of this phrase in section 15.2, with the result that this particular 
problem will cease to exist. It is also probable that a court today would 
have little hesitation in holding that a sale, at least of labelled goods, in a 
self-service store is a sale by description; as an earlier American court re- 
marked about such a sale, 37 "the printed word [is] the silent salesman". 
Nevertheless, to resolve any lingering doubts, we recommend the adoption 
of a provision comparable to section 13(2) of the U.K. Act in the revised 
Ontario Act. 38 

(c) seller's liability for description of goods by third party 

The problem of deemed adoption by the seller of the labelling and 
other descriptive materials originating from a third party and attached to 
or accompanying the goods, is more troublesome. This problem was not 
considered in the Report of the English and Scottish Law Commissions. 
As we pointed out in our Warranties Report, 39 there is a striking dearth 
of authority on this point, and some clarification would appear to be de- 
sirable. In our view, the general proposition should be that a description 
of the goods given by a third person is binding on the seller only if by his 
words or conduct he has adopted the description as his own. The Com- 
mission recommends the insertion in the revised Act of a provision to 
this effect. 40 

This recommendation, however, still leaves at large the question 
whether a different rule should be applied in the case of merchant sellers; 
for example, should a merchant seller be deemed to adopt the representa- 
tions made by a manufacturer, whether by labelling or otherwise? The 
Warranties Report 41 favoured the imposition of some additional obligations 
in the context of consumer sales; we reasoned that there was no greater 
hardship in holding a retailer responsible for the manufacturer's labelling, 
than there was in holding him responsible for the merchantability and fit- 
ness of goods manufactured by others. It appears to us that this reasoning 
is also sound in the case of non-consumer sales. It is to be understood 
that the purpose of such a deemed adoption is not to penalize the merchant 
seller but, rather, to provide the buyer with some readily accessible means 
of redress if the labelling turns out to be inaccurate. The seller would, of 
course, have his usual rights of indemnity against the manufacturer or 
other person from whom he had acquired the goods. 

As previously indicated, 42 we would not go as far as section 7(2) of 
Bill 110, The Consumer Products Warranties Bill, 1976, 43 in holding the 
retailer jointly liable with the manufacturer for any express warranty given 
in writing or published by the manufacturer. With section 7(2) of Bill 



VCorvan N. Sams v. Ezy-Way Foodliner Co. (1961), 170 A. 2d 160 (Me. Sup. 

Ct.). See, also, Great Atlantic & Pacific Tea Co. v. Walker (1937), 104 S.W. 

2d 627 (Tex. Civ. App.), 634. 
38See, Draft Bill, s. 5.11(2). 
^Supra, footnote 1, pp. 34-39. 
40See, Draft Bill, s. 5.11(3). 
41 Supra, footnote 1, p. 35. 
42 Supra, ch. 6, sec. A.2(d). 
43 Bill 110, 3rd Sess. 30th Legislature. This Bill was not enacted. 



205 

110 may be contrasted section 2-314(2) (f) of the Code. This section pro- 
vides as follows: 

2-314.(2) Goods to be merchantable must be at least such as . . . 

(f ) conform to the promises or affirmations of fact made on the 
container or label if any. 

This provision seems to us to strike a reasonable balance between pro- 
viding no guidance as to what types of representations the merchant-seller 
is deemed to adopt as his own, and holding him responsible for everything 
the manufacturer may say. 44 Subject to the modification discussed below, 
the Commission recommends adoption of a similar provision in the revised 
Act. 45 We are also attracted by the Code's perception that the merchant- 
seller's responsibility for accurate labelling forms part of a reasonable inter- 
pretation of merchantable quality, quite apart from the question whether 
the contents of the labels form part of the seller's express warranties. 
Accordingly, the Draft Bill also deals with the merchant seller's additional 
obligations with respect to representations made by third parties as part 
of the warranty of merchantability. We would, however, recommend a 
modification to the Code provision. In our view, the equivalent provision 
in the revised Ontario Act should be enlarged slightly so as to encompass 
representations or promises on other material accompanying the goods, as 
well as those appearing on the "container or label". 46 

It remains to be considered whether the word "description" itself 
needs to be defined. We recommend against a definition. The concept of 
"description" is a difficult concept, and one that over the years has oc- 
casioned much difference of opinion among courts and commentators. 47 
To some, the term should be confined to those elements essential to the 
identification of the subject matter of the contract; to others, it is broad 
enough to encompass a variety of attributes not restricted to identification, 
which, of itself, is an elusive concept. Yet another group of decisions would 
link the meaning to the context in which the question arises for decision. 48 
Given its variant meaning, the better part of wisdom would appear to be 
to avoid the term whenever possible. The English and Scottish Law Com- 
missions accomplished this objective, in part, by recommending 49 the dele- 

44 We assume that this Code provision covers the labelling of third parties, as 
well as the seller's own labelling. The distinction does not appear to be dis- 
cussed in the Comments accompanying UCC 2-314, nor in the few cases on 
subsection (2)(f). See, for example, Reddick v. White Consolidated Industries 
Inc. (1969), 295 F. Supp. 243 (Ga. Dist. Ct.); Carnes Construction Co. v. 
Richards & Conover Steel & Supply Co. (1972), 10 U.C.C. Rep. 797 (Okl. Ct. 
App.). 

45See, Draft Bill, s. 5.13(l)(b)(v). 

4 ^Ibid. The need for the extension is illustrated by the Reddick case, footnote 
44 supra, in which the buyer complained about inadequate instructions in the 
manual supplied by the seller-manufacturer of a gas heater. 

47 See, inter alia, the discussion in Benjamin's Sale of Goods (1974), paras. 764- 
80; and Williston on Sales (Rev. ed., 1948), sees. 224-25, and the authorities 
there cited. 

4 8See, for example, Henry Kendall & Sons v. William Lillico & Sons, Ltd., 
[1969] 2 A.C. 31 (H.L.); Christopher Hill, Ltd. v. Ashington Piggeries, Ltd., 
[1972] A.C. 441 (H.L.). 

^Supra, footnote 22, at pp. 48-49. 



206 

tion of the term in the implied conditions of merchantability and fitness. 
This recommendation has now been implemented in the Supply of Goods 
(Implied Terms) Act 1973. 50 Article 2 also avoids the use of the term in 
the corresponding Code sections, UCC 2-314 and 2-315, and in other con- 
texts 51 by-passes the semantic difficulty by adopting the concept of "non- 
conforming goods". This Commission has also sought to avoid use of the 
term wherever possible 52 and recommends a similar approach in the revised 
Ontario Act. 

3. The Implied Conditions of Quality and Fitness 
(a) general considerations 

Section 15 of The Sale of Goods Act concerns itself with two implied 
terms of major importance: namely, those of merchantability and of fitness 
for purpose. Section 15 provides in part as follows: 

15. Subject to this Act and any statute in that behalf, there is no 
implied warranty or condition as to the quality or fitness for any par- 
ticular purpose of goods supplied under a contract of sale, except as 
follows : 

1. Where the buyer, expressly or by implication, makes known 
to the seller the particular purpose for which the goods are 
required so as to show that the buyer relies on the seller's 
skill or judgment, and the goods are of a description that it 
is in the course of the seller's business to supply (whether 
he is the manufacturer or not), there is an implied condition 
that the goods will be reasonably fit for such purpose, but 
in the case of a contract for the sale of a specified article 
under its patent or other trade name there is no implied 
condition as to its fitness for any particular purpose. 

2. Where goods are bought by description from a seller who 
deals in goods of that description (whether he is the manu- 
facturer or not), there is an implied condition that the 
goods will be of merchantable quality, but if the buyer has 
examined the goods, there is no implied condition as regards 
defects that such examination ought to have revealed. 

Three questions arise for general consideration. The first question is con- 
cerned with the preamble to section 15. The second question asks whether 
any changes should be made to the balance of the section. The third ques- 
tion is whether section 15 should be extended to private sales. Before 
turning to a discussion of these questions, we pause to note that it follows 
from our earlier recommendation that the implied terms of merchantability 
and fitness should be designated as warranties in the revised Act. 



501973, c. 13, s. 2 (U.K.). 
51 For example, UCC 2-601. 

52For example, we recommend, infra, deletion of the words "by description" in 
the provision dealing with the implied warranty of merchantability. 



207 

It seems anomalous to us that the preamble to section 15 should still 
appear to convey the impression that the implied terms are exceptions to 
the caveat emptor rule, and not the other way around. Generally speaking, 
unless successfully excluded, one or other of the two terms, and frequently 
both, will apply where the seller is a merchant with respect to the goods, 
and the great majority of sales are made by professional sellers. The pre- 
amble has not been reproduced in the Code and, in our view, it no longer 
serves a useful purpose. We therefore recommend that the preamble to 
section 15 should not be reproduced in the revised Act, and that the im- 
plied warranties should be expressed in positive terms. 

The next question to which we turn is whether any basic change 
should be made in the balance of the section. As is well known, the implied 
conditions of merchantability and fitness frequently overlap, and it might 
be thought that one or other is redundant. Such overlapping does not, 
however, occur in all cases, and will not occur even if the changes recom- 
mended below are implemented. We recommend retention of both implied 
terms. However, it does seem anomalous that the condition of fitness 
should appear before the condition of merchantability, and we recommend 
that the order be reversed. 

Section 15 only applies to merchant sellers, and the last question is 
whether either of the implied warranties should be extended to private 
sellers. The traditional justifications for the restriction to merchant sellers 
are threefold: namely, that a merchant seller holds himself out as posses- 
sing special skill and knowledge with respect to the goods; that he sells for 
profit; and, that he is in a better position to absorb, or to pass on, any 
loss resulting from undiscoverable defects than the average buyer. None of 
these considerations applies to a non-merchant seller. We accept the con- 
tinuing validity of this reasoning, and do not recommend that the implied 
terms of merchantability and fitness be extended to private sales. This 
recommendation does not, however, resolve the question whether a pri- 
vate seller should at least be under an obligation to disclose defects in the 
goods that are actually known to him, and that are not obvious from a 
visual inspection of the goods. The question does not lend itself readily to 
statutory resolution and is, in our view, best left for judicial development by 
means of the doctrines of good faith and fair dealing, mistake, and con- 
structive fraud. 53 



53American developments in this area are instructive. Generally, American 
courts have been unwilling to imply warranties as such in the sale of goods, 
usually used goods, by private sellers. See, for example, Keating v. DeArment 
(1967), 193 So. 2d 694 (Fla. Dist. Ct. App.). However, the courts may take 
a different attitude where the seller knew of the defect and failed to disclose 
it. In the real property sector, an increasing number of American courts are 
showing a willingness to impose liability on private sellers for such non-disclo- 
sure on a theory of fraudulent concealment. See, for example, Obde v. 
Schlemeyer (1960), 353 P. 2d 672 (Wash. Sup. Ct.); and compare, Carlish 
v. Salt, [1906] 1 Ch. 335. Other, generally earlier, courts have taken a nar- 
rower viewpoint: Swinton v. Whitinsville Savings Bank (1942), 42 N.E. 2d 
808 (Mass. S.C.); and compare, Scott-Poison v. Hope (1958), 14 D.L.R. (2d) 
333 (B.C.S.C). See, further, Goldfarb, "Fraud and Non-Disclosure in the 
Vendor-Purchaser Relation" (1956), 8 W. Res. L. Rev. 5; and Haskell, "The 
Case for an Implied Warranty of Quality in Sales of Real Property" (1964-65), 
53 Geo. LJ. 633, at pp. 642-43. 



208 

(b) THE IMPLIED CONDITION OF MERCHANTABILITY 

It will be convenient to set out, once again, section 15.2 of the On- 
tario Sale of Goods Act. The section provides as follows: 

15.2. Where goods are bought by description from a seller who 
deals in goods of that description (whether he is the manufacturer or 
not), there is an implied condition that the goods will be of mer- 
chantable quality, but if the buyer has examined the goods, there is 
no implied condition as regards defects that such examination ought 
to have revealed. 

The Warranties Report 54 drew attention to a substantial number of respects 
in which the existing section is ambiguous or defective, and made appropri- 
ate recommendations for change. Some of the changes were also recom- 
mended by the English and Scottish Law Commissions and have now been 
implemented in the U.K. Supply of Goods (Implied Terms) Act 1973. 
As a result, the revised section in the U.K. Sale of Goods Act reads: 

14.(2) Where the seller sells goods in the course of a business, 
there is an implied condition that the goods supplied under the con- 
tract are of merchantable quality, except that there is no such condi- 
tion 

(a) as regards defects specifically drawn to the buyer's attention 
before the contract is made; or 

(b) if the buyer examines the goods before the contract is made, 
as regards defects which that examination ought to reveal. 

The amended Act also contains the following definition of merchantable 
quality: 

62.(1 A) Goods of any kind are of merchantable quality within the 
meaning of this Act if they are as fit for the purpose or purposes for 
which goods of that kind are commonly bought as it is reasonable to 
expect having regard to any description applied to them, the price (if 
relevant) and all the other relevant circumstances; and any refer- 
ence in this Act to unmerchantable goods shall be construed accord- 
ingly. 

Subject to the exceptions noted hereafter, we support the U.K. changes. 
There are, however, a substantial number of points that also require con- 
sideration, and to these we now turn our attention. 

(i) Sale "By Description" 
Under section 15.2, the implied warranty only applies where the 
goods are bought "by description". There is no reference to this require- 
ment in the amended U.K. section dealing with the implied condition of 
merchantable quality. As previously indicated, we support the elimination 
of the requirement of a sale by description, and so recommend. We do so 
on two grounds. First, the courts have deprived the phrase "by descrip- 
tion" of most of its meaning in the context of section 15.2, and it would 
be confusing to retain the phrase. Secondly, for reasons stated, we consider 
it desirable to avoid the use of the term "description" wherever possible. 

5*Supra, footnote 1, pp. 36 et seq. 



209 



(ii) Character of Seller 



Section 15.2 of the Ontario Act not only requires a sale "by descrip- 
tion", but also requires that the goods be purchased from a seller "who 
deals in goods of that description". In the amended U.K. Act, it need only 
be shown that the seller sold the goods "in the course of a business". 55 
In our view, undesirable results could flow from imposing a condition of 
merchantability on a business seller, regardless of whether he deals, or has 
ever purported to deal, in goods of the kind offered for sale. As com- 
mentators have noted 56 a literal reading of the U.K. language would lead, 
as the Law Commissions apparently intended it to lead, 57 to liability at- 
taching to a seller who was disposing of a piece of capital equipment that 
had become surplus to his requirements; for example, disposition of a 
truck by a fuel supplier. 

If the only result of the British approach were to entitle the buyer to 
a reduction in the price if the truck turned out to be in poorer condition 
than the buyer had a right to assume, we could accept it with equanimity. 
Indeed, a persuasive argument could be made for permitting such an action 
in quanti minoris against any seller. 58 It seems reasonable to assume, 
however, that, under the U.K. approach, the seller's liability would en- 
compass the full measure of damages recoverable under the rule in Hadley 
v. Baxendale, 59 including any consequential damages suffered by the 
buyer. We do not think this desirable. Accordingly, we recommend that 
the warranty of merchantability should be restricted in the revised Act to 
a seller who deals in goods of the kind supplied under the contract of sale. 
We note that this is the same test as is used in UCC 2-314(1), although 
the Code employs slightly different language. 

(iii) Sales by an Agent 

The English and Scottish Law Commissions recommended 60 that, 
where a sale by a private seller is effected through an agent acting in 
the course of business, the conditions of merchantable quality and fitness 
for purpose should be implied, unless reasonable steps have been taken 
to inform the buyer before the contract is made that the sale is on behalf 

55 Emphasis added. 

^Benjamin's Sale of Goods (1974), para. 788; Law Reform Commission, New 
South Wales, Working Paper on the Sale of Goods (1975), para. 8.7. 

5 1 First Report on Exemption Clauses in Contracts, footnote 22 supra, para. 31, 
n. 30, and para. 46. 

58 The actio redhibitoria and action in quanti minoris were permitted in classical 
Roman law for rescission of the sale or a reduction in the price if the goods 
suffered from a latent vice unknown to the buyer and which he could not have 
discovered by reasonable examination before the purchase. The seller's knowl- 
edge of the defects was equally immaterial. Apparently the remedies were not 
restricted to suits against commercial sellers. See Buckland, A Text-Book of 
Roman Law from Augustus to Justinian (3rd ed., 1966), pp. 491 et seq. These 
grounds of relief, seemingly rooted in concepts of unjust enrichment and fair 
dealing, survive in modern civil law systems. See, for example, Quebec C. Civ., 
arts. 1522 et seq.; and compare, Treitel, "Remedies for Breach of Contract", 
in International Encyclopedia of Comparative Law, Vol. VII, pp. 16-57 to 16- 
60. 

59(1854), 9 Exch. 341. 

toSupra, footnote 22, para. 55. 



210 

of a private seller, or unless the buyer was otherwise aware of the fact. 
This recommendation, too, has been implemented in the Supply of Goods 
(Implied Terms) Act 1973, 61 which added a new section 14(5) to the 
U.K. Sale of Goods Act. After careful consideration, a majority of the 
Commission 62 has decided not to follow this recommendation. It appears 
to us that the equities are fairly evenly divided as between the private 
seller and the buyer, and that an insufficient case has been made out for 
changing the existing law. Let us suppose, for example, that a dealer who 
holds goods on consignment from a non-merchant seller fails to disclose 
his agency capacity to the buyer. Although, under existing law, the buyer 
would appear to be unable to sue the undisclosed principal for breach 
of the warranties of merchantability or fitness, he would still have his 
remedy against the agent. It would seem less obvious that the principal 
would have a right of indemnity against the agent for failure to disclose 
his agency capacity, if the U.K. amendment were adopted, unless a pro- 
vision to this effect were also added. Again, it would not occur to the 
average principal that he must instruct his agent to be sure to disclose 
not only his status as agent, but also the fact that he is acting for a private 
seller. Moreover, if he did give such instructions, it is not clear whether 
they would satisfy the requirements of section 14(5) of the U.K. Act 
that "reasonable steps" must be taken to bring the facts to the notice 
of the buyer before the contract is made. In the result, the U.K. amend- 
ment raises as many difficulties as it purports to resolve. So far as we have 
been able to ascertain, the existing law has not caused serious practical 
problems and, in the absence of persuasive evidence to the contrary, we 
see no sufficient justification for change. Accordingly, we recommend that 
the revised Act should not contain a provision similar to section 14(5) of 
the U.K. Sale of Goods Act, as amended. 

(iv) Meaning of "Merchantable Quality" 
(1) General Considerations 

The Ontario Sale of Goods Act contains no definition of "merchant- 
able quality". The expression "quality of goods" is defined in section 
1(1) (j) as including their state or condition, but this throws little light on 
the meaning of the term "merchantable". Over the years the term has 
attracted conflicting judicial interpretations. 63 This is not surprising, given 
its etymological and historical origins and the widely varying contexts 
in which the question arises for decision. 64 The meaning of merchantability 

6 il973,c. 13 (U.K.),s. 3. 

62 One of the Commissioners, the Honourable Richard A. Bell, does not concur 
in this recommendation. In Mr. Bell's opinion, where a private seller retains 
the services of an agent who acts in the course of his business, and unless 
the buyer is made aware that the sale is on behalf of a private seller, the buyer 
is entitled to assume that the sale is being made by the agent himself in the 
course of his business with all the implied warranties attached to such a sale. 
He would adopt the recommendations of the English and Scottish Law Com- 
missions and the principle set forth in section 14(5) of the U.K. Sale of Goods 
Act as enacted by the Supply of Goods (Implied Terms) Act 1973. 

63 These interpretations are reviewed in Henry Kendall & Sons v. William Lillico 
& Sons Ltd., [1969] 2 A.C. 31 (H.L.). 

64 As to which see, generally, Prosser, "The Implied Warranty of Merchantable 
Quality" (1943), 21 Can. Bar Rev. 446. 



211 

was subjected to close scrutiny by the House of Lords in Henry Kendall 
& Sons v. William Lillico & Sons Ltd., 65 and a majority of the Law Lords 
supported, 66 with or without modification, a test put forward by Dixon, J., 
in Australian Knitting Mills Ltd. v. Grant. 61 This test was to the following 
effect: 

The condition that goods are of merchantable quality requires that 
they should be in such an actual state that a buyer fully acquainted 
with the facts and, therefore, knowing what hidden defects existed, 
and not being limited to their apparent condition would buy them 
without abatement of the price . . . and without special terms. 

The English and Scottish Law Commissions, in their Working Paper 
on Exemption Clauses 6S adopted an amplified version of Dixon, J.'s test. 69 
The Commission, however, abandoned this amplified version in their 
Report 70 in favour of the definition of merchantable quality that now 
appears, with inconsequential changes, in section 62(1A) of the U.K. 
Act. 71 

The reason given for the change was 72 that the earlier definition had 
been criticized as being unduly complicated, and that the new definition 
was more in line with Article 33(l)(d) of the Uniform Law on the 
International Sale of Goods, and with one of the minimum standards 
of merchantability adopted in UCC 2-314(2) (c). The Report does not 
suggest, however, that any difference in result was intended. Benjamin, 
at least, takes the view that the definition is largely declaratory of the prior 
case law, which "may be regarded as still relevant". 73 

However, we understand 74 that some counsel at the English Bar and 

65 Supra, footnote 63. 

66 The approval must now be read in the light of the qualifying remarks in 
B. S. Brown & Son Ltd. v. Craiks Ltd., [1970] 1 W.L.R. 752, [1970] 1 All 
E.R. 823 (H.L.), on the relevance of price in determining merchantability. 
67(1933), 50 C.L.R. 387 (Austr. H.C.), 418, reproduced in Benjamin's Sale of 

Goods (1974), para. 798. 
68Law Com. W.P. No. 18, Scot. Law Com. Memorandum No. 7, Provisional 
Proposals Relating to Amendments to Sections 12-15 of the Sale of Goods Act 
1893 and Contracting Out of the Conditions and Warranties Implied by those 
Sections (1968). 
69 The Law Commissions' version provided as follows: 

'Merchantable quality' means that the goods tendered in performance of the 
contract shall be of such type and quality and in such condition that having 
regard to all the circumstances, including the price and description under 
which the goods are sold, a buyer, with full knowledge of the quality and 
characteristics of the goods, including knowledge of any defects, would, 
acting reasonably, accept the goods in performance of the contract. 
See, Exemption Clauses in Contracts, First Report, footnote 22 supra, p. 16, 
n. 46. 
7°Supra, footnote 22, para. 43. 
71 Section 62(1 A) is reproduced supra, at p. 208. 
12 Supra, footnote 22, para. 43. 

1 ^Benjamin's Sale of Goods (1974), paras. 801, 794. For a similar view, see 
Atiyah, The Sale of Goods (5th ed., 1975), p. 85. Lord Denning opined in 
Cehave N.V. v. Bremer Handelsgesellschaft m.b.H., [1975] 3 W.L.R. 447 
(C.A.), 457, that the statutory definition was "the best that has yet been 
devised". 
74 We are indebted to Professor Reuben Hasson of the Osgoode Hall Law School, 
York University, for drawing our attention to the information that follows. 



212 

a number of teachers of commercial law in the United Kingdom adopt a 
different position. Their view is that, even if inadvertently, section 62(1A) 
differs from the definition of "merchantable quality" initially adopted in 
the Law Commissions' Working Paper in one or two respects. First, it is 
said that, since section 62(1 A) speaks of the goods as being "fit for the 
purpose or purposes" for which goods of that kind are commonly bought, 
this test excludes cosmetic or other defects which do not interfere with 
the functional or use value of the goods, but which may reduce their 
resale value or general acceptability. Hence, it is argued, for example, that 
a new car that is delivered in a scratched and dirty condition and with 
other minor defects that do not affect the road-worthiness of the vehicle 
would satisfy the statutory definition of merchantable quality contained 
in section 62(1 A), even though it might not satisfy the common law test. 

In our view, leaving aside all other considerations, 75 this places an 
unjustifiably narrow construction on the meaning of "fitness", and also 
ignores the statutory definition of "quality of goods", which is not re- 
stricted to functional characteristics. Nevertheless, we agree that it is 
desirable to remove the doubt created by the words "fit for the purpose 
or purposes". Accordingly, with this objective in mind, we recommend 
that the revised Act should adopt a definition of "merchantable quality", 
and that this definition, although based on section 62(1 A) of the U.K. 
Act, should include reference to the quality and condition of the goods. 
Our recommended definition would read as follows: 76 

In this section 'merchantable quality' means 

(a) that the goods, whether new or used, are as fit for the one 
or more purposes for which goods of that kind are com- 
monly bought and are of such quality and in such condition 
as it is reasonable to expect having regard to any descrip- 
tion applied to them, the price, and all other relevant 
circumstances; (Emphasis added) 

It will be observed that we have added the words in italics to make it 
clear that merchantable quality is not restricted to the functional or use 
value of the goods. If this amendment is adopted, there no longer appears 
any need for a separate statutory definition of quality of goods, and none 
appears in our Draft Bill. 

The second point raised by the British observers is that a test of 
reasonable fitness is not the same as asking whether a reasonable buyer, 
knowing of the defects from which the goods suffer, would accept the 



^Including the not unimportant consideration that it is in conflict with earlier 
decisions in various parts of the Commonwealth: see, for example, Jackson v. 
Rotax Motor & Cycle Co., Ltd., [1910] 2 K.B. 937 (C.A.); l.B.M. v. Shcher- 
ban, [1925] 1 D.L.R. 864 (Sask. C.A.); Winsley v. Woodjield (1929), 48 
N.Z.L.R. 480 (N.Z.S.C.). Some of the reasoning in the Cehave case, footnote 
73 supra, is difficult to reconcile with these and other decisions that were not 
referred to in the case. The facts however in the Cehave case were of a very 
unusual character, and may have coloured the Court's perception of the mean- 
ing of merchantable quality. 

76See, Draft Bill, s. 5.13(1) (a). 



213 

goods in performance of the contract. This point may be illustrated by 
referring to our earlier example of a new car that is delivered in a dirty 
and scratched condition. The British observers would suggest that, apply- 
ing the test of Dixon, J., a reasonable buyer would not accept such a car 
in performance of the contract. They would also suggest that, as new 
cars are often delivered in an imperfect condition, such a car would not, 
on that account, be regarded as unfit for its purpose within the meaning 
of section 62 (1A). We do not find this argument persuasive. First, it 
suggests that goods are reasonably fit within the meaning of section 
62(1 A) so long as the defects are commonly encountered and are not too 
serious in nature. Stated in this bald form, we find it an unattractive pro- 
position. To so construe section 62(1A) places a premium on shoddy 
workmanship and poor quality control, and puts the buyer completely 
at the mercy of prevailing industry standards. Secondly, this construction 
wrongly assumes that a reasonable buyer would reject goods that suffer 
from minor defects, even though he needs the goods, knows that he could 
not do better by buying them elsewhere and, in the case of durable goods, 
could anticipate a bona fide effort by the dealer or manufacturer to rectify 
the defects. We are therefore led to the conclusion that there is no es- 
sential distinction in this regard between the test of merchantable quality 
propounded by Dixon, J., and the definition in section 62(1A), and we 
see no need for further amendment to this aspect of the U.K. definition. 

We have two other reasons for adopting this position. As is explained 
below, we recommend amplification of the definition of merchantable 
quality by adding criteria of merchantability drawn from UCC 2-314 and 
other sources. This should provide greater specificity in doubtful situa- 
tions. The other, and still more important, reason is that the consequences 
of a breach of the implied term of merchantable quality differ funda- 
mentally under our proposed remedial regime from the consequences 
under the U.K. Act. Under that Act, the implied term of merchantable 
quality is a condition and, once a breach is shown, the buyer is entitled 
to reject the goods, however minor the defect. This consideration appears 
to have exerted a substantial influence on the interpretation of the mean- 
ing of merchantable quality by British commentators. Under our pro- 
posals, an initial right of rejection will only arise for a "substantial" 
breach and, even then, if certain conditions are satisfied, the seller may 
still have a right to cure the non-conformity. 77 In the case of minor 
defects, the buyer's primary remedy 78 will lie in a claim for damages. We 
would therefore anticipate a greater willingness on the part of a court 
to find a breach of the warranty of merchantability, since the conse- 
quences, in the case of minor defects, will not be draconian from the 
seller's point of view. 



77 See, supra, ch. 6, sec. B; and infra, ch. 17, sec. C.l(d)(ii); and Draft Bill, 

ss. 7.7, 8.1. 
78 We refer to "primary", but not exclusive, remedy since, in some circumstances, 

the buyer may be entitled to reject even for minor breaches where the seller 

fails to cure the non-conformity when requested to do so. See, Draft Bill, s. 7.7 

(4), (5). 



214 

(2 ) "Purpose or Purposes" 

The definition of "merchantable quality" in section 62(1A) of the 
U.K. Sale of Goods Act requires goods to be fit for the "purpose or pur- 
poses" for which goods of that kind are commonly bought. In Henry 
Kendall & Sons v. William Lillico & Sons Ltd., 19 the House of Lords held 
that goods are merchantable if they are fit for some of the purposes for 
which the goods are normally used, even though they are unfit for other 
purposes, equally normal, so long as there are persons who, knowing 
of the defect, are willing to buy the goods and still pay the same price 
for them. In our Warranties Report*® we criticized this test as leading to 
haphazard and unfortunate results, and urged its statutory reversal, at 
least for consumer sales. In our view, this criticism is just as apt for non- 
consumer sales. The definition of merchantable quality that now appears 
in section 62(1A) of the U.K. Act reverses the rule in Henry Kendall 
& Sons v. William Lillico & Sons Ltd. As indicated, this definition requires 
the goods to be as fit "for the purpose or purposes" for which goods of that 
kind are commonly bought as it is reasonable to expect, having regard 
to the factors listed in the definition. The expanded definition in section 
62(1 A) has been criticized in the New South Wales Working Paper 81 
on the ground of the additional burden it imposes on merchant sellers. 
For a number of reasons, we do not think this concern is justified. First, 
the added burden will only be marginal and may, in the case of defective 
products causing injury to person or property, be expected to be covered 
by liability insurance. Secondly, the House of Lords has substantially 
undermined the test in Henry Kendall & Sons v. William Lillico & Sons 
Ltd., by the expanded interpretation of the warranty of fitness that a 
majority of the Law Lords adopted in the Ashington Piggeries case. 82 
As a result we recommend that, as in the case of section 62(1 A) of the 
amended U.K. Sale of Goods Act, the definition of merchantable quality 
in the revised Act should require goods to be fit for "the one or more 
purposes for which goods of that kind are commonly bought". 83 

(3 ) Used Goods 

The English and Scottish Law Commissions clearly assumed that 
the statutory warranty of merchantability applies to the sale of used, as 
well as new, goods, and intended the definition of merchantable quality 
to encompass both types of goods. As the Warranties Report pointed out, 84 
the Canadian cases on this point are conflicting. Although the more recent 
cases 85 amply support the Law Commissions' assumption, it would, in our 



79[1969] 2 A.C. 31 (H.L.). 

8Q Supra, footnote 1, pp. 39-40. 

^Supra, footnote 12, para. 8.38. 

^Christopher Hill Ltd. v. Ashington Piggeries Ltd., [1972] A.C. 441 (H.L.). 

83See, Draft Bill, s. 5.13(1) (a). 

% 4 Supra, footnote 1, p. 39. 

85See, for example, Henzel v. Brussels Motors Ltd., [1973] 1 O.R. 339, (1973) 
31 D.L.R. (3d) 131 (Co. Ct.); Presley v. MacDonald, [1963] 1 O.R. 619, 
(1963), 38 D.L.R. (2d) 237 (Co. Ct.); Green v. Holiday Chevrolet-Oldsmobile 
Ltd., [1975] 4 W.W.R. 445 (Man. C.A.); compare, Crowther v. Shannon 
Motor Co., [1975] 1 W.L.R. 30 (C.A.). 



215 

view, be helpful to make the position clear in the revised Act. We there- 
fore recommend that the revised Act should provide that the implied 
warranty of merchantability applies to used, as well as to new, goods. 86 
This does not, of course, mean that a buyer of used goods from a mer- 
chant is entitled to expect goods in as merchantable a condition as new 
goods of the same type could be expected to be; how much he can reason- 
ably expect will depend on "all . . . relevant circumstances". 87 

(4) Durability 

The Warranties Report 88 also felt it desirable to clarify the status 
of the important concept of durability. In our view, intervening develop- 
ments have fully justified our earlier recommendation that an implied 
warranty of reasonable durability of the goods supplied should be in- 
cluded in the proposed Consumer Products Warranties Act. This recom- 
mendation has, however, encountered strong resistance from various in- 
dustry groups. Presumably, the same objections would be raised if a 
durability provision were to be inserted in the revised Sale of Goods Act. 
The gravamen of the objections 89 lies in the complaint that "reasonable 
durability" is an elusive concept, that it has no generally understood 
meaning, and that the introduction of the concept into sales law would 
invite a long period of litigation. Despite these criticisms, it appears 
that at least some manufacturers would support a concept of "minimum" 
durability, if regulations were available to define the period of durability 
for particular products. 90 

We sympathize with the manufacturers' apprehensions, but we do 
not believe that their objections come to grips with the basic problem. 
As our Warranties Report points out, 91 the concept of durability is not 
new; it is inherent in the concept of merchantability, and there is respect- 
able authority to support the concept. The purpose of our recommenda- 
tion in the Warranties Report was not to innovate, but to clarify. More- 
over, it may, indeed, be questioned whether the concept of durability is 
more uncertain than the concept of merchantability. A concept of mini- 
mum durability is helpful in the consumer context, where regulations are 
a feasible device to provide certainty; but this solution is not likely to be 
available in a general sales act, which must of necessity encompass an 
infinite range of goods. For this reason, a concept of minimum durability 
can do little to dispel uncertainty in the general sales area. 

Having regard to these considerations, we believe it is as desirable for 



86See, Draft Bill, s. 5.13(l)(a). 

Mlbid. 

MSupra, footnote 1, pp. 37-38. 

89 We refer, for example, to a brief submitted to the Ontario Government by the 
Canadian Manufacturers' Association, in December 1973. 

mbid. 

91 In addition to the case law cited in the Report (p. 37), see also the authorities 
cited in Benjamin's Sale of Goods (1974), para. 411, note 48; most of the 
authorities, like Mash and Murrell Ltd. v. Joseph I. Emmanuel Ltd., [1961] 
1 W.L.R. 862, rev'd on other grounds [1962] 1 W.L.R. 16 (C.A.), appear 
to be concerned with the question as to which of the parties bears the risk 
of deterioration in transit. 



216 

the revised Sale of Goods Act to clarify the status of durability, as it is in 
an act dealing with consumer warranties. The Saskatchewan Consumer 
Products Warranties Act, 1977 92 imports a statutory warranty of reason- 
able durability, as did Ontario Bill 110. 93 It would be anomalous, in our 
view, if a retailer's basic warranty rights against a manufacturer, who sup- 
plies him with a defective product, were to be treated less favourably than 
the consumer's rights against the retailer when the product is resold to the 
consumer. We would, however, modify our earlier recommendation in 
one respect: we would treat reasonable durability as one of the require- 
ments of the warranty of merchantable quality, and not as a wholly separ- 
ate warranty. This meets the comments of friendly British critics, 94 who 
have argued that a separate warranty is not required because the concept 
of merchantable quality is sufficiently flexible to embrace a requirement 
of reasonable durability. Accordingly, the Commission recommends that 
the definition of merchantable quality in the revised Act should require 
that the goods will remain fit or perform satisfactorily, as the case may be, 
for a reasonable length of time having regard to all the circumstances. 95 
Finally, we would stress that, as with any other implied warranty, it will 
be open to sellers under the revised Act to modify the warranty of mer- 
chantable quality and to specify their own periods of minimum durability. 96 
To the extent that such provisions are not regarded as unconscionable, 
sellers should thus be able to avoid the uncertainty to which they object in 
an undefined statutory term. 

(5) Spare Parts and Repair Facilities 

Our Report on Consumer Warranties and Guarantees in the Sale of 
Goods 91 also recommended adding a new implied warranty by the seller 
that spare parts and reasonable servicing facilities, where relevant, will be 
available with respect to new goods being sold. After careful consideration, 
the majority 98 of the Commission has reached the conclusion that a similar 
requirement should be included in the revised Act, and so recommends. 99 
On reflection, however, we consider that, as has been done in Bill HO, 100 
it might be better to describe this new warranty as a warranty of spare 
parts and repair facilities, rather than as a warranty of spare parts and 
servicing facilities. 

The reasons for our recommendation are twofold. In the first place, 
if our Warranties Report is implemented and a retail seller is to be held 



9 2S.S. 1976-77, c. 15, s. 11.7. 

93Bill 110, 3rd Sess., 30th Legislature (Ont.). As indicated, this Bill received first 
reading on June 15, 1976, but was not proceeded with. 

94 English Law Commission, Working Paper No. 71, Law of Contract: Implied 
Terms in Contracts for the Supply of Goods (1977), paras. 71-75. 

95See, Draft Bill, s. 5.13(1) (b)(vi). 

96See, Draft Bill, s. 5.16. 

91 Supra, footnote 1, pp. 40-41. 

98Two of the Commissioners, the Honourable J. C. McRuer, and Mr. W. Gib- 
son Gray, dissent in part from this recommendation, and would require only 
that "spare and replacement parts" rather than "spare parts and repair facili- 
ties", be available. 

99See, Draft Bill, s. 5.13(1) (c). 
lOOSee, s. 5. 



217 

responsible to the consumer for the observance of this implied promise, 
it seems only reasonable that he should be entitled to expect a similar 
undertaking from the manufacturer. Secondly, given the fact that complex 
durable products require spare parts and repairs during their lifetime, the 
availability of spare parts and repair facilities does seem to us to come 
within the expanded concept of a modern warranty of merchantability. As 
in the case of durability, the seller will be free to modify, or even to 
disclaim entirely, this aspect of merchantability, subject, once again, to 
the test of unconscionability; but, ordinarily, the burden should be on him 
to do so rather than for the buyer to have to bargain specifically with 
respect to these features of the goods. The merchant seller is the expert, 
and he knows the position best. Moreover, as with all other aspects of 
merchantability, the implication is only a relative one, and it may be 
rebutted by the surrounding circumstances. 101 For example, it may not be 
reasonable to imply a guarantee of spare parts and repair facilities where 
a large utility orders to specification a new piece of engineering equipment. 
Again, the buyer of an exotic imported sports car should appreciate that 
he may encounter difficulties in having it serviced or repaired in Ontario. 

(6) Other Specifications of Merchantability 

UCC 2-314(2) provides: 

(2) Goods to be merchantable must be at least such as 

(a) pass without objection in the trade under the contract 
description; and 

(b) in the case of fungible goods, are of fair average quality 
within the description; and 

(c) are fit for the ordinary purposes for which such goods are 
used; and 

(d) run, within the variations permitted by the agreement, of 
even kind, quality and quantity within each unit and among 
all units involved; and 

(e) are adequately contained, packaged, and labeled as the 
agreement may require; and 

(f) conform to the promises or affirmations of fact made on 
the container or label if any. 

It will be recalled that our recommended definition of "merchantable 
quality" incorporates the provisions of subsection (c), and that sub- 
section (f) has also been dealt with earlier. In our view, the provisions of 
subsections (a), (b), (d), and (e) could also usefully be incorporated 
in the revised Ontario Act, and we so recommend. 102 Subsection (a) 
appears to be covered by existing authority, 103 and would presumably also 
be caught by the general requirement that the contract must be construed 
in accordance with the usage prevailing in a particular trade. Subsection 

^Compare, Draft Bill, s. 5.13(1) (c), "unless the circumstances indicate other- 
wise". 
!02See, Draft Bill, s. 5.13(1) (b). 
WJ ones v. Just (1868), L.R. 3 Q.B. 197. 



218 

(b) may be new, 104 but appears to reflect a common contractual require- 
ment for at least some types of fungible commodities. 105 Subsections (d) 
and (e) are also covered, at least in part, by existing law. 

One point remains to be considered under this heading. In Sumner 
Permain & Co. v. Webb & Co., 106 the English Court of Appeal held that, 
where goods were bought in England for shipment and resale in the 
Argentine, the goods were of merchantable quality even though they con- 
tained an ingredient not permitted under Argentine law. We have con- 
sidered whether the revised Ontario provision on merchantability should 
address itself specifically to this type of problem. We have, however, 
concluded that this would be neither desirable nor necessary. It would not 
be right, as a general proposition, to oblige a seller to familiarize himself 
with the requirements of every jurisdiction to which his goods may be 
exported. If the foreign buyer seeks compliance with his own law, he 
should bring this home to the seller. In our view, the implied warranty 
of fitness is sufficiently flexible to cope with this problem. 

(v) Effect of Buyer's Examination 

Section 15.2 of the Ontario Sale of Goods Act provides that, if the 
buyer has examined the goods, the condition of merchantable quality 
does not apply as regards defects that "such examination ought to have 
revealed". 107 This test has been criticized as being too favourable to the 
buyer. 108 First, it is said, it encourages the buyer not to examine the goods. 
Secondly, even if he does examine the goods, the buyer is only deemed 
to have notice of defects that "such" (that is, his actual) examination 
ought to have revealed. On a literal reading of this proviso, the buyer is 
under no obligation to conduct a reasonably careful examination. It will 
be observed, however, that the test is not wholly subjective, since the 
buyer will be deemed to be aware of defects which his examination "ought 
to have revealed". A further criticism is that section 15.2 is not consistent 
with the buyer's position in the case of a sale by sample, dealt with in 
section 16(2) (c) of the existing Act, since, in this instance, the seller's 
warranty only extends to freedom from defects that would not be ap- 
parent on "reasonable examination of the sample". The test here is wholly 
objective. 

As to the latter criticism, it is our view that the inconsistency be- 
tween sections 15.2 and 16(2) (c) is more apparent than real, since the 
purpose of a sample is to enable the buyer to determine for himself the 
quality of the goods offered. 109 The first criticism was examined by the 

104 For the pre-Code position, see Williston on Sales (Rev. ed., 1948), Vol. 1, 
sec. 243, pp. 641-42; and compare, Taylor v. Combined Buyers Ltd., [1924] 
N.Z.L.R. 627 (S.C.),645. 

lOSCompare, Christopher Hill Ltd. v. Ashington Piggeries Ltd., [1972] A.C. 441 
(H.L.). 

i06[l922] 1 K.B. 55 (C.A.). Compare, Winsor & Associates Ltd. v. Belgo Cana- 
dian Mfg. Co. Ltd., [1975] W.W.D. 173 (B.C.S.C), following Niblett Ltd. 
v. Confectioners' Materials Co. Ltd., [1921] 3 K.B. 387 (C.A.). 

^Italics added. 

108 See, Law Reform Commission, New South Wales, Working Paper on The Sale 
of Goods (1975), paras. 8.59 et seq. 

W9Mody v. Gregson (1868), L.R. 4 Ex. 49. 



219 

English and Scottish Law Commissions. 110 The Commissions concluded 
that it would not be desirable to return to the pre- 1893 position, which 
deemed the buyer to have notice of any defects discoverable on examina- 
tion whether or not he had examined the goods. We agree with this con- 
clusion. We are somewhat more troubled by the criticism that the buyer 
who conducts a perfunctory examination of the goods may be better off 
than the diligent buyer, especially since the Code has avoided this 
anomaly. 111 On balance, however, we have decided to recommend no 
change. The problem does not appear to be of great practical importance, 
and we believe there is sufficient elasticity in the language of the proviso, 
coupled with the general requirement of good faith, to enable a court 
to avoid its unfair operation against either party. Accordingly, our Draft 
Bill provides that the implied warranty of merchantability does not apply, 
if the buyer examined the goods before the contract was made, "with 
respect to any defect that such an examination ought to have revealed". 112 

The Law Commissions did not, however, consider the present statut- 
ory provision to be entirely satisfactory. The Commissions recommended 113 
extending the proviso in one direction by excluding the condition of 
merchantability with respect to defects in the goods specifically drawn by 
the seller to the buyer's attention. We support this change and recommend 
that a similar provision be incorporated in the revised Act. 114 

(vi) Conclusion: Draft Provision 

In the light of the foregoing discussion, we now reproduce our re- 
commended version of the new warranty of merchantable quality. 115 

( 1 ) In this section 'merchantable quality' means, 

(a) that the goods, whether new or used, are as fit for the one 
or more purposes for which goods of that kind are com- 
monly bought and are of such quality and in such con- 
dition as it is reasonable to expect having regard to any 
description applied to them, the price, and all other relevant 
circumstances; 

and, without limiting the generality of clause a, 

(b) that the goods 

(i) are such as pass without objection in the trade under 
the contract description, 

(ii) in the case of fungible goods, are of fair average 

quality within the description, 
(iii) within the variations permitted by the agreement, 

are of even kind, quality and quantity within each 

unit and among all units involved, 



no Supra, footnote 22, para. 48. 
niUCC 2-316(3)(b). 
H2See, Draft Bill, s. 5.13(3) (b). 
n *Supra, footnote 22, para. 49. 
H4See, Draft Bill, s. 5.13(3) (a). 
HSSee, Draft Bill > s - 5 - 13 - 



220 

(iv) are adequately contained, packaged and labeled as 
the nature of the goods or the agreement require, 

(v) conform to the representations or promises made on 
the container or label or other material, if any, 
accompanying the goods, and 

(vi) will remain fit or perform satisfactorily, as the case 
may be, for a reasonable length of time having regard 
to all the circumstances; and 

(c) in the case of new goods, unless the circumstances indicate 
otherwise, that spare parts and repair facilities, if relevant, 
will be available for a reasonable period of time. 

(2) Where the seller is a person who deals in goods of the kind 
supplied under the contract, there is an implied warranty that the 
goods are of merchantable quality. 

(3) The implied warranty of merchantable quality does not 
apply, 

(a) as regards defects specifically drawn to the buyer's atten- 
tion before the contract was made; 

(b) if the buyer examined the goods before the contract was 
made, with respect to any defect that such an examination 
ought to have revealed; or, 

(c) in the case of a sale by sample or model, with respect to 
any defect that would have been apparent on reasonable 
examination of the sample or model. 

(c) THE IMPLIED CONDITION OF FITNESS 

Where goods are supplied under a contract of sale, a condition of 
fitness may be implied under section 15.1 of the Ontario Sale of Goods 
Act. For convenience, we again set out section 15.1: 

Where the buyer, expressly or by implication, makes known to the 
seller the particular purpose for which the goods are required so as 
to show that the buyer relies on the seller's skill or judgment, and 
the goods are of a description that it is in the course of the seller's 
business to supply (whether he is the manufacturer or not), there 
is an implied condition that the goods will be reasonably fit for such 
purpose, but in the case of a contract for the sale of a specified 
article under its patent or other trade name there is no implied 
condition as to its fitness for any particular purpose. 

This section corresponds to former section 14(1) of the U.K. Sale of 
Goods Act. Following the recommendation of the English and Scottish 
Law Commissions, 116 section 14(1) was amended and now appears as 
section 14(3) of the U.K. Sale of Goods Act. This section reads as 
follows : 

14.(3) Where the seller sells goods in the course of a business and 



utSupra, footnote 22, paras. 30-39. 



221 

the buyer, expressly or by implication, makes known to the seller 
any particular purpose for which the goods are being bought, there 
is an implied condition that the goods supplied under the contract 
are reasonably fit for that purpose, whether or not that is a purpose 
for which such goods are commonly supplied, except where the 
circumstances show that the buyer does not rely, or that it is un- 
reasonable for him to rely, on the seller's skill or judgment. 

The amended section incorporates the following changes: 

(1) The condition of fitness is no longer confined to sales where 
the goods are "of a description that it is in the course of the 
seller's business to supply". It is sufficient that the goods are 
sold in the course of a seller's business. 

(2) The proviso involving the sale of goods under a patent or trade 
name has been deleted. 

(3) It is no longer necessary for the buyer to show that he relied on 
the seller's skill and judgment. Instead, the condition of fitness 
will be implied unless the circumstances are such as to show that 
the buyer did not rely, or that it was unreasonable for him to 
rely, on the seller's skill and judgment. 

(4) The revised section brings the statutory language into alignment 
with the case law, 117 and makes it clear that the "particular 
purpose" covers a normal or usual purpose as well as a special 
or unusual purpose. 

We support these changes and, with the exception mentioned hereafter, 
recommend their inclusion in the revised Act. 118 The exception to which 
we refer relates to the opening line of section 14(3) of the U.K. Act, 
which makes the implied warranty of fitness applicable to all sales by a 
seller "in the course of a business". Here, consistently with the position 
adopted by us with respect to the condition of merchantable quality, 119 
we recommend that the new warranty of fitness continue to be restricted 
to sales by a seller who deals in goods of the kind supplied under the 
contract of sale. We realize that, where the seller does not deal in goods 
of the kind supplied under the contract, there will be no warranty of 
fitness. This should not, however, preclude a buyer from being able to 
show that, even though the seller was not a merchant with respect to the 
goods sold to the buyer, there was communicated reliance on his skill and 
judgment, and that the seller had expressly warranted the fitness of the 
goods for the indicated purpose. In such circumstances, we think it better 
that the burden should rest on the buyer to make out such a case; the 
seller should not have to show, as apparently he would have to show under 
the U.K. amendment, that the buyer did not rely, or that it was unreason- 
able for him to rely, on the seller's skill and judgment. 

The U.K. version of the condition of fitness concludes with the words, 



H7For example, Grant v. Australian Knitting Mills Ltd., [1936] A.C. 85 (P.C.) 

H8See, Draft Bill, s. 5.14. 

MSupra, p. 209; compare, Draft Bill, s. 5.13(2). 



222 

"or that it is unreasonable for him to rely". Some concern has been ex- 
pressed that these words may enable a seller to escape liability where the 
goods suffer from a latent defect of which he could not reasonably have 
been aware. The Law Commissions clearly did not intend such a result; 
nor do we. Like merchantable quality, the condition of fitness is a species 
of strict liability: 120 while reliance, express or implied, on the seller's skill 
or knowledge is a prerequisite to the successful invocation of the condition, 
questions of negligence have never been relevant in determining the 
seller's liability. 121 We have considered whether this ambiguous phrase 
should be deleted in the revised Act, but this would lead to new difficulties. 
In our Draft Bill, 122 therefore, we have incorporated the proviso un- 
changed. 

4. Sale by Sample 

Section 16 of the Ontario Sale of Goods Act reads as follows: 

16.(1) A contract of sale is a contract for sale by sample where 
there is a term in the contract, express or implied, to that effect. 

(2) In the case of a contract for sale by sample, there is an implied 
condition, 

(a) that the bulk will correspond with the sample in quality; 

(b) that the buyer will have a reasonable opportunity of com- 
paring the bulk with the sample; and 

(c) that the goods will be free from any defect rendering them 
unmerchantable that would not be apparent on reasonable 
examination of the sample. 

Various commentators 123 have pointed out that this section suffers from 
a number of weaknesses and peculiarities. First, as to section 16(1), it 
has been objected that the requirement that there cannot be a sale by 
sample unless there is an express or implied term to this effect, is too 
rigid; this requirement obliges the court to find a contractual intention that 
the transaction be a sale by sample. This objection, that a contractual 
intention must be shown, appears to be the same as the one directed 
generally to the definition of express warranty; we have dealt with this 
previously 124 by deleting the requirement of a contractual intention from 
that definition. 125 It follows, if our earlier recommendation is adopted, 
that whether or not a sale is a sale by sample will depend on the general 
application of the reliance test for express warranties: 126 section 5.10(1) 
of our Draft Bill, in defining "express warranty", refers to a "representa- 
tion or promise in any form relating to goods". In our view, this wording 

^Randall v. Newson (1877), 2 Q.B.D. 102 (C.A.). 

!2lCompare, Frost v. The Aylesbury Dairy Co. Ltd., [1905] 1 K.B. 608 (C.A.). 

l22See, Draft Bill, s. 5.14(2). 

123 See, for example, Benjamin's Sale of Goods (1974), paras. 835 et seq; Law 

Reform Commission, New South Wales, Working Paper on The Sale of Goods 

(1975), paras. 11.7 et seq. 
MSupra, ch. 6. 
^ssee, Draft Bill, s. 5.10(1). 
^See, Williston on Sales (Rev. ed., 1948), sec. 252, pp. 670-71. 



223 

is broad enough to encompass any form of communication, whether ex- 
pressed in words or otherwise, and is meant to include representations 
conveyed by means of a model or sample. 

The other objections relate to section 16(2). It has been contended 
that, by force of section 16(2) (c), the condition of merchantability ap- 
plies to goods whether or not the seller is a merchant with respect to 
those goods; on the other hand, the general implied condition of mer- 
chantability, as contained in section 15.2, applies only where the seller is 
a person who deals in goods of that description. This is an oversight that 
should be corrected in the revised Act, and we so recommend. Another 
difficulty is that, as to examination, the section imposes a higher degree 
of care on a buyer where the sale is by sample than does section 15.2, 
where the sale is not by sample. We have dealt with this previously 127 
and have expressed the view that the inconsistency is more apparent than 
real. Finally, section 16(2) (b) appears to be redundant, since section 
33 of the Act confers on the buyer a general right to examine goods for 
conformity at the time of delivery if he has not examined them previously. 

Apart from these observations, our general conclusion is that there 
is no longer need for a separate section 16, and that those parts that retain 
their utility can be readily absorbed in other provisions of the revised 

Act. 128 



5. Implied Warranties in a Lease of Goods 129 

The implied warranties and conditions in The Sale of Goods Act do 
not apply to leasing contracts; nor is there any other Ontario statute that 
clarifies the position with respect to the applicability to leasing contracts 
of the implied warranties and conditions in a contract of sale. In a pre- 
vious chapter, 130 we indicated our support for clarification. We turn now 
to consider what types of provision might be appropriate. Once again, we 
emphasize that the following observations are only directed to true leases 
of goods; leases that are in substance disguised secured sales will, following 
our earlier recommendation, 131 be governed by the revised Act so far as 
their sales incidents are concerned. 

It may be useful to begin with a summary of the current common 



l 21 Supra, this chapter, sec. 3(b) (v). 

128 Section 16(1) has been deleted and subsumed under the definition of express 
warranty in section 5.10(1) of the Draft Bill. Section 16(2) (a) of the existing 
Act has been incorporated in section 5.1 1(1) (b) of the Draft Bill dealing with 
the express warranty of description. Section 16(2)(b) has been absorbed in 
section 7.12(1) of the Draft Bill. Section 16(2) (c) of the existing Act appears 
in altered form in section 5.13 (3 )(c) of the Draft Bill. 

129 We use the terms lease, rental and hire interchangeably. In North America 
"lease" tends to be used for longer term bailments for use and "rental" for short 
term purposes. "Hire" appears to be the favoured British term for both types 
of arrangement, although the terminology fluctuates on both sides of the 
Atlantic. 

HQSupra, chapter 4, sec. 3(f). 

Wlbid. 



224 

law position. 132 It would appear 133 that substantially the same implied 
terms of description and correspondence to sample apply to a lease trans- 
action as in a sale; but there is no authority with respect to the status 
of the implied term of merchantability. The decisions do not mention 
"merchantability" as such, only "fitness". 134 The scope of the implied term 
of fitness in a leasing transaction also requires clarification. 135 First, it is 
not clear whether the implied term amounts to a condition or warranty. 
Secondly, and more importantly, it is unsettled in Anglo-Canadian law 
whether the lessor warrants the fitness of the chattel absolutely, or whe- 
ther his obligation is limited to providing a chattel as fit as reasonable 
care and skill can make it. 136 

There are also difficulties with respect to the implied terms of title 
and absence of encumbrances. It is settled law 137 that the lessor does not 
warrant his title, only quiet possession. This is unlike a hire-purchase 
agreement where, since Karflex Ltd. v. Poole, 138 the courts have been 
willing to imply a condition of title in the hirer's favour. It is uncertain 
whether the lessor in a true lease warrants that the goods are free from 
encumbrances, 139 although, logically, the position should be the same as 
with respect to the implied term of title. It may be thought that the war- 
ranty of quiet possession is sufficient to protect the lessee in all foreseeable 
circumstances; but it has been argued 140 that this assumption may not be 
correct. The case is posited of a lessee who is sued in conversion by the 
true owner after the lease has terminated and the goods have been re- 
turned to the lessor. In such circumstances, it is argued, the implied 
warranty of quiet possession would not have been breached, and it might 
be difficult for the lessee to seek indemnity from the lessor in the absence 
of an implied term of title. However, even if this argument is correct 
and there is a gap in the existing legal framework, it does not follow 
that the implication of a warranty of title in all leases, regardless of their 
duration or other features, is the proper solution. The cure could be 
worse than the disease. We return to this problem below. 

The common law position has recently been reviewed by the English 
Law Commission. 141 The Commission concluded that, 142 except with 
respect to the implied term of title, there is a close similarity between the 

132 See, generally, Law Commission Working Paper No. 71, Law of Contract: 
Implied Terms in Contracts for the Supply of Goods (1977), Part III. 

133/6/W., para. 47. 

MI bid., para. 61. 

135 7 bid., paras. 49 et seq. 

^Compare, Law Commission W.P. No. 71, footnote 132 supra, paras. 48-59. In 
Canada, Boorman v. Morris, [1944] 2 W.W.R. 12 (Alta. S.C.), Matheson v. 
Watt (1956), 19 W.W.R. 424 (B.C.C.A.), and Crawford v. Ferris, [1953] 
O.W.N. 713 (H.C.J.), all show a preference for the qualified liability theory. 
See, also, Canadian-Dominion Leasing Corp. Ltd. v. Suburban Superdrug Ltd. 
(1966), 56 D.L.R. (2d) 43 (Alta. S.C., App. Div.), where the stricter stan- 
dard appears to have been applied, but without discussion. 

l37Law Com. W.P. No. 71, footnote 132 supra, para. 46. 

138[1933] 2 K.B. 251. 

i39Law Com. W.P. No. 71, footnote 132 supra, para. 46. 

l40Goode, Introduction to The Consumer Credit Act, 1974, para. [9.20]. 

141 Supra, footnote 132. 

Mlbid., para. 64, p. 39. 



225 

terms implied in a contract of sale and a contract of hire, and that the 
terms implied in these two types of contract should now be assimilated 
"yet more closely". The Commission gave several reasons for its recom- 
mendations, one of which was 143 "the desirability of producing overall 
consistency in the law relating to contracts for the supply of goods". More 
specifically, the substance of the Commission's recommendations was as 
follows: 144 

(1) With the exception of the implied undertakings as to title, 
the implied obligations of the supplier in respect of goods supplied 
under a contract of hire should be assimilated to those implied in a 
contract of sale; and 

(2) that the following terms should be implied with respect to the 
supplier's title and the hirer's right to quiet possession; namely, that 

(a) the supplier has the right to hire out the goods throughout 
the period of hire; 

(b) the goods are free and will remain free, throughout the 
period of hire, from any charge or encumbrance not dis- 
closed to the hirer before the agreement was made; and 

(c) the hirer is entitled to quiet possession of the goods through- 
out the period of hire. 

We agree with the first recommendation and with items (a) and 
(c) in the second recommendation; indeed, the introduction of an im- 
plied term that the lessor has the right to lease out the goods, such as is 
contained in item (a), should resolve the case posited above. Accordingly, 
we recommend that these provisions be incorporated in the revised Act. 
We are, however, unable to support item (2)(b). If it is assumed, as the 
Law Commission assumed, that the lessee in a true lease does not require 
the protection of a warranty of title, 145 then it is difficult to justify the 
introduction of a warranty of freedom from encumbrances. The Law 
Commission provides no clear reason for this recommendation, other than 
the fact that the U.K. Supply of Goods (Implied Terms) Act 1973 146 
contains such an implied term with respect to hire-purchase agreements. 
In our view, this analogy is not apt. A hire-purchase agreement is only a 
disguised form of conditional sale, a fact that the U.K. Act recognizes by 
also importing a condition of title in the hirer's favour in the case of a 
hire-purchase agreement. Moreover, there are functional considerations 
that militate against the introduction of an implied term of freedom from 
encumbrances. It is not unusual for a professional lessor to give a security 
interest in all or part of his inventory. Serious difficulties might arise if a 
lessee were held entitled to repudiate a leasing agreement because he had 
not previously been told that the chattels leased to him were subject to a 



Mlbid., para. 64, p. 40. 
mibid., para. 79, p. 50. 
wibid., para. 65. 
H61973, c. 13 (U.K.),s. 8(l)(a). 



226 

security interest, even though there was no interference with his quiet 
possession. 147 

Subject to the exception we have noted, and a further point of dif- 
ference about to be mentioned, we support, and our Draft Bill 148 seeks to 
give effect to, the Law Commission's recommendations. Since our Draft 
Bill abolishes the distinction between warranties and conditions, it follows 
that the same will be true with respect to the implied terms in a leasing 
contract. This may raise a question with respect to the remedies of an 
aggrieved lessee. Our Draft Bill does not purport to assimilate the remedies 
of a lessee with those of a buyer, but we anticipate no difficulty in the 
courts' applying by analogy the remedial provisions in the Draft Bill. In 
particular, we anticipate that the courts will have no difficulty in applying 
the concept of substantial breach as governing the lessee's right to reject 
defective goods. 

6. Cumulation and Conflict of Express and Implied Warranties 

Section 15.4 of the Ontario Sale of Goods Act provides: 

An express warranty or condition does not negative a warranty or 
condition implied by this Act unless inconsistent therewith. 

The English and Scottish Law Commissions observed 149 that the logical 
place for this provision was section 55 of the U.K. Act, which corres- 
ponds to section 57 of the Ontario Act. The Commissions did not, how- 
ever, address themselves to a more important difficulty; namely, that 
section 15.4 does not provide constructional guidance where the express 
and implied terms appear to be in conflict. A virtue of UCC 2-317 is that 
it attempts to provide such guidance. This section reads as follows: 

2-317. Warranties whether express or implied shall be construed 
as consistent with each other and as cumulative, but if such construc- 
tion is unreasonable the intention of the parties shall determine 
which warranty is dominant. In ascertaining that intention the follow- 
ing rules apply: 

(a) Exact or technical specifications displace an inconsistent 
sample or model or general language of description. 

(b) A sample from an existing bulk displaces inconsistent 
general language of description. 



147 It might be argued that the holder of a long term lease is more analogous to 
a buyer than a "mere" hirer and that his rights, at least, should be assimilated 
to those of a buyer. There is some support for this suggestion in the proposals 
of the Saskatchewan Law Reform Commission to treat chattel leases for more 
than a year as creating a security interest. See Law Reform Commission of 
Saskatchewan, Proposals for a Saskatchewan Personal Property Security Act 
(July, 1977), s. 2(34) (iv). Without necessarily rejecting the suggestion, for the 
purpose of a revised Sale of Goods Act we think the lessee would be sufficiently 
protected by allowing him to invoke, by analogy, the right to seek an adequate 
assurance of performance from the lessor: see, Draft Bill, s. 8.9. 

!48See, Draft Bill, s. 5.15. 

^Supra, footnote 22, para. 56. 



227 

(c) Express warranties displace inconsistent implied warranties 
other than an implied warranty of fitness for a particular 
purpose. 

It is not clear to what extent these provisions change prior law. 150 In any 
event, UCC 2-317 is, in our view, superior to section 15.4, and we re- 
commend the adoption of a similar provision in the revised Act. 151 

The rationale of UCC 2-3 17(c) may not be obvious at first sight, and 
the following illustration offered by a learned commentator may be 
helpful: 152 

Suppose that a written contract for the purchase of refrigeration 
equipment for a cold storage room includes express warranties that 
the motor is of 3 H.P. and the equipment will deliver 10 tons of 
refrigeration. These specifications reflected seller's judgment of the 
size required to cool buyer's room. The unit is too small, and buyer 
seeks to recover for breach of an implied warranty of fitness based 
on seller's knowledge of the size of the cold storage room and 
buyer's reliance on seller's skill and judgment to select a unit of 
sufficient capacity. 

On these facts, seller might contend that the specifications as to 
capacity written into the contract are inconsistent with an implied 
warranty of fitness based on buyer's contention that the unit should 
be larger. Section 2-3 17(c) of the Code meets this argument; the 
implied warranty of fitness would prevail. 

Anglo-Canadian case law appears to support this result. 153 

7. Regulation of Disclaimer Clauses 154 

(a) a general approach 

The doctrine of unconscionability finds its most fruitful application in 
policing a common practice by manufacturers and merchants: namely, 
the exclusion or restriction of the conditions and warranties implied in 
the buyer's favour under The Sale of Goods Act, and the remedies that 
the law confers upon a buyer for breach of the seller's warranty obliga- 
tions. 155 The replies to the CM. A. Questionnaire, and the contract forms 
made available to the Research Team, indicate that such attempts are 



i50On this point, see, NYLRC Study, ch. 5, footnote 52, supra, pp. (410)-(413); 
and Duesenberg and King, Sales and Bulk Transfers Under the Uniform Com- 
mercial Code, Bender's Uniform Commercial Code Service, Vol. 3, pp. 7.52.22- 
7.53. 

151 See, Draft Bill, s. 5.17. 

i52See, NYLRC Study, footnote 150 supra, p. (412). 

153Baldry v. Marshall, [1925] 1 K.B. 260 (C.A.); Nicholson and Venn v. Smith- 
Marriott (1947), 177 L.T. 189 (K.B. Div.); and, Wallis, Son & Wells v. 
Pratt & Haynes, [1911] A.C 394 (H.L.). See, also, North-West Thresher Co. 
w.Andrews (1908), 8 W.L.R. 827 (Alta. S.C, Tr. Div.). 

15 4See, also, Michael Trebilock, "Disclaimer Clauses", Research Paper No. III. 5. 

i55\Vhile the question of remedies is dealt with in later chapters, it will be con- 
venient to deal at this point with the question of disclaimer clauses as they 
relate to remedies for breach of the warranties. 



228 

almost as frequent in commercial sales as they are with respect to con- 
sumer goods. 

The legitimacy of disclaimer clauses in consumer transactions was 
examined extensively by this Commission in its Report on Consumer 
Warranties and Guarantees in the Sale of Goods. We concluded that, 156 
on balance, such clauses could not be justified. Our Report, therefore, 
recommended that the use of disclaimer clauses should be prohibited in 
consumer sales, and that exceptions to the general rule should only be 
permitted in carefully regulated circumstances. 157 To what extent should 
this recommendation be extended to commercial sales? 

We are firmly of the view that the solution adopted in our Warranties 
Report would be too draconian in the context of commercial sales. We 
believe that there are sufficient differences between consumer sales and 
commercial sales, each taken as a group, to justify a different approach 
in the case of commercial sales. The rationale for disallowing disclaimer 
clauses in consumer transactions is the serious disparity in bargaining 
power, resources, and knowledge between the average consumer, on the 
one hand, and the retailer from whom he makes his purchase or the manu- 
facturer who produces the goods, on the other. It seems right, therefore, 
that the burden of absorbing the loss resulting from the distribution of 
defective goods should fall, ultimately, on the manufacturer who, in most 
cases, is best able to absorb such losses. These assumptions do not hold 
true in the case of non-consumer sales; or, at any rate, do not hold true 
with sufficient regularity to justify the application of identical disclaimer 
rules. One would not seriously contend, for example, that a government 
department is incapable of protecting its own interests when purchasing 
supplies, or that a large automobile manufacturer does not bargain from 
a position of equal strength when dealing with its own suppliers. 

This is not to say that, in the commercial context, buyer and seller 
are .always bargaining on equal terms, and that the buyer is always cap- 
able of protecting his own interests. 158 The proposition is manifestly un- 
tenable. The dividing line between a consumer sale and a commercial 
sale is often a fine one, and many non-consumer buyers are not noticeably 
more sophisticated, or in a better bargaining position, than the average 
consumer. We are, therefore, agreed that what is required is a flexible 
approach that will enable the court to take into account fully the circum- 
stances of individual cases. In our view, the doctrine of unconscionability 
is as apt to fill this office with respect to disclaimer clauses, as it is in 
relation to other terms that are impugned on the grounds of their gross 
unfairness. 

We have earlier recommended 159 that the revised Act should incor- 
porate a general unconscionability provision. We feel that this provision 



!56See, Ontario Law Reform Commission, Report on Consumer Warranties and 

Guarantees in the Sale of Goods (1972), p. 49. 
l57Compare, Bill 110, 3rd Session, 30th Legislature (Ont.), s. 8(1). 
l58This point is forcibly argued in Professor Trebilcock's research paper, footnote 

154 supra, pp. 38 et seq. 
WSupra, ch. 7. 



229 

will confer upon the courts an explicit policing power that will serve the 
business community better than the approach currently adopted by the 
courts. As we noted in our Warranties Report, 160 and as has been docu- 
mented again in the research paper prepared for the Commission on this 
topic, 161 the courts, under the guise of rules of construction or doctrines 
of fundamental breach, now regularly disregard even the clearest dis- 
claimer clauses. Unfortunately, this is not being done on any rational 
basis. Sometimes, indeed, the process occurs in the face of compelling 
evidence that the buyer had freely accepted the disclaimer clause, and 
was just as capable of absorbing the loss that occurred as was the seller. 162 
There is no guarantee that the introduction of the doctrine of unconscion- 
ability will lead to a swift reversal in the present judicial approach to 
disclaimer clauses. In the long run, however, it should result in a more 
balanced attitude, and in a more explicit canvassing of the competing 
interests that strive for recognition. 163 

Accordingly, the Commission recommends the insertion of a provi- 
sion in the revised Act to the following effect: 164 

Subject to the provisions of this Act on unconscionability, 165 

(a) a warranty implied under this Act; 

{b) the effect of a representation or promise which would other- 
wise amount to an express warranty; and 



l^Supra, footnote 156, ch. 3, especially at pp. 50 et seq. 

161 5wpm, footnote 154, pp. 10 et seq. 

162 See, for example, Canso Chemicals Ltd. v. Canadian Westinghouse Co. Ltd. 
(1974), 54 D.L.R. (3d) 517 (N.S.C.A.); R. G. McLean Ltd. v. Canadian 
Vickers Ltd. et al., [1971] 1 O.R. 207, 15 D.L.R. (3d) 15 (C.A.); Harbutt's 
Plasticine v. Wayne Tank and Pump Co. Ltd., [1970] 1 Q.B. 447, [1970] 1 
All E.R. 225 (C.A.). 

!63This hope is borne out by the recent decision of Griffiths, J., in R. W. Green 
Ltd. v. Cade Bros., [1978] 1 Lloyd's Rep. 602(Q.B.). 

i64See, Draft Bill, s. 5.16(1). 

165 One of the Commissioners, the Honourable Richard A. Bell, believes that an 
obligation of good faith should be a prerequisite to the effectiveness of a dis- 
claimer clause and that this should be reflected in section 5.16(1) of the Draft 
Bill. At one stage, the Commission had agreed that the running head in section 
5.16(1) should read "Subject to the provisions of this Act on unconscionability 
and good faith". The italicized words were omitted in the final draft (with 
Mr. Bell dissenting) on the ground that, under the structure of the Draft Bill, 
the obligation of "good faith" relates to performance and not to formation of 
the contract of sale. While Mr. Bell has grave reservations about the structure 
of the Draft Bill not requiring "good faith" in the formation as well as the 
performance of the contract, he believes that the control of disclaimer clauses 
is so vital that, whatever the structure of the Draft Bill, "good faith" should be 
an imperative element in testing the attempt to disclaim statutory rights and 
obligations. The objection to the original draft of the running head on the 
ground of the structure of the Draft Bill could be met by revising it to read, 
"Subject to the provisions of this Act on unconscionability and provided the 
parties act in good faith". 

Mr. Bell expresses vigorously his opinion that the criteria in section 5.2 of the 
Draft Bill are not sufficiently broad to protect a purchaser from a vendor 
acting in bad faith. Bad faith in itself does not render a contract unconscion- 
able, but in Mr. Bell's opinion, it should operate to prevent a party from 
disclaiming what would otherwise be his statutory obligations. 



230 

(c) the remedies for breach of a warranty, 

may be modified, limited or excluded by agreement of the parties. 

The adoption of such a provision will not, however, answer all the ques- 
tions involving the use of disclaimer clauses. We turn now to consider a 
number of specific issues, including the broader topic of the extent to 
which the revised Act should provide guidelines with respect both to 
permissible types of disclaimer clauses, and to those that prima facie will 
be deemed unreasonable. Article 2 contains a substantial number of 
indices of both types. 

(b) SPECIFIC ISSUES 166 

(i) Construction of Terms that Limit or Negate Express 
Warranties 

This problem has been touched on in an earlier context, but needs 
now to be considered a little more fully. It may be stated in this way. In 
one part of an agreement, a seller may undertake to confer particular 
benefits on the buyer; for example, to supply seed of a particular descrip- 
tion. Another part of the agreement may, however, appear to deny such 
entitlement; for example, by means of a clause excusing the supplier if the 
seed supplied is not of the correct description. 167 How can these provi- 
sions be reconciled? The present Ontario Sale of Goods Act provides no 
guidance. As has been noted previously, section 15.4 addresses itself to 
the interrelationship of express and implied warranties. This provision 
has no bearing on the construction of a term of the agreement, not 
amounting to a warranty, that purports to limit or negate an express 
warranty. The courts have generally shown themselves hostile to attempts 
to negate express warranties. UCC 2-316(1) reflects the same approach, 
and provides: 

2-316.(1) Words or conduct relevant to the creation of an express 
warranty [168] and words or conduct tending to negate or limit warranty 
shall be construed wherever reasonable as consistent with each other; 
but subject to the provisions of this Article on parol or extrinsic evi- 
dence (Section 2-202) negation or limitation is inoperative to the 
extent that such construction is unreasonable. 

This provision, while adding nothing inherently new, is useful: it makes 
it clear that where, and to the extent that, an express warranty and a term 
of the contract tending to negate the express warranty cannot be reason- 



166 The treatment of disclaimer of title clauses has already been discussed pre- 
viously, and is therefore omitted in the present discussion. See supra, this 
chapter, sec. 1(f). 

l67Compare, Wallis, Son & Wells v. Pratt & Haynes, [1911] A.C. 394 (H.L.). 

168 This circuitous phrasing was apparently adopted in response to criticism by 
the NYLRC Study of an earlier version of UCC 2-316(1). This provided 
that "if an agreement creates an express warranty, words disclaiming it are 
inoperative". The objection raised was the familiar one that one cannot 
determine whether or not an express warranty exists until all the terms of the 
agreement have been examined. The revised language was designed to over- 
come this objection. 



231 

ably construed as consistent with each other, the express warranty pre- 
vails. We recommend the adoption of a similar provision in the revised 
Act. In view of our earlier recommendation, however, this new provision 
should contain no reference to the parol evidence rule. 169 

We recognize a possible objection that such a provision would merely 
invite the courts to re-introduce the doctrine of fundamental breach, and 
would enable them to avoid difficult enquiries about the fairness of the 
impugned disclaimer provision. This is not our intention; nor was it the 
intention of the Code. We would expect the courts to rely upon the doc- 
trine of unconscionability rather than upon constructional techniques in 
order to prevent what the courts might feel was an unreasonable result. 
In any event, this possibility is not, in our view, a sufficient reason for 
denying statutory recognition to a well established rule of construction. 170 

(ii) Guidelines Concerning Exclusion or Modification of 
Implied Warranties: UCC 2-316 

We have already recommended that disclaimer clauses should not be 
prohibited, but should be controlled by the doctrine of unconscionability. 
Subsections (2) and (3) (a) of UCC 2-316 contain specific guidelines 
that spell out the means by which, or the circumstances in which, the 
implied warranties can be excluded or modified. These subsections pro- 
vide as follows : 

2-316.(2) Subject to subsection (3), to exclude or modify the 
implied warranty of merchantability or any part of it the language 
must mention merchantability and in case of a writing must be con- 
spicuous, and to exclude or modify any implied warranty of fitness 
the exclusion must be by a writing and conspicuous. Language to 
exclude all implied warranties of fitness is sufficient if it states, for 
example, that 'There are no warranties which extend beyond the 
description on the face hereof.' 

(3) Notwithstanding subsection (2) 

(a) unless the circumstances indicate otherwise, all implied 
warranties are excluded by expressions like 'as is', 'with 
all faults' or other language which in common understand- 
ing calls the buyer's attention to the exclusion of war- 
ranties and makes plain that there is no implied warranty; 

Subsection (2) deals with the use of appropriate written terms to exclude 
the implied warranties of merchantability or fitness. Subsection (3) (a) 
sanctions the use of such exculpatory expressions as "as is", "with all 
faults", or other language "which in common understanding calls the 
buyer's attention to the exclusion of warranties and makes plain that there 
is no implied warranty". 



l69See, Draft Bill, s. 5.16(3). 

l70See, for example, Sloan v. Empire Motors Ltd. (1956), 18 W.W.R. 145, 3 
D.L.R. (2d) 53 (B.C.C.A.), where the Court relied on the express language 
of the agreement in order to deny effect to a conflicting disclaimer clause. 



232 

Two principal objections have been expressed with respect to these 
provisions. 171 One is that they lead to successive and partly conflicting 
layers of review of the admissibility of disclaimer clauses. The other is 
that to sanction the effectiveness of linguistic formulae is to invite their 
ritualistic incantation, without regard either to whether they have any 
meaning to the buyer in a particular case, or to whether the buyer is free 
to reject the imposition of such terms. 

We accept both these criticisms, and we do not recommend adoption 
of these features of UCC 2-316. The great volume of litigation that they 
have spawned 172 indicates the difficulty of framing categorical rules to 
control the type of language that is sufficient to exclude the implied war- 
ranties. Even such familiar terms as "as is", and goods sold "with all 
faults", are susceptible of different meanings. Their uncritical acceptance 
can lead to mischievous results if not subjected to an overriding test of 
unconscionability. A basic, and, in our view, irremediable, weakness about 
UCC 2-316(2) and (3) (a) is that they ignore the many other considera- 
tions that should go into determining whether the use of exculpatory 
terms, in a particular context, is fair. In short, there is a fundamental 
conflict between the flexibility of the approach adopted in UCC 2-302, in 
dealing with questions of unconscionability, and the rigidity of the solu- 
tions offered in UCC 2-316. 

While we do not support the Code's linguistic formulae, we have, 
by recommending the inclusion in the revised Act of the above-mentioned 
explicit provision governing disclaimer of warranty obligations, 173 recog- 
nized the value of making it clear that the freedom of the parties to make 
their own contract also applies to the exclusion of express and implied 
warranties and the remedies for their breach. 

(iii) Disclaimer Clauses Deemed Prima Facie Unconscionable 

At the other end of the spectrum there is, as mentioned, the question 
of whether the revised Act should contain guidelines with respect to the 
types of disclaimer clauses that are prima facie unacceptable. UCC 
2-719(3) provides, in part, as follows: 

. . . Limitation of consequential damages for injury to the person 
in the case of consumer goods is prima facie unconscionable but 
limitation of damages where the loss is commercial is not. 

As American commentators have noted, 174 there is an apparent incon- 
sistency between this provision and UCC 2-316(2). UCC 2-316(2) allows 
the seller to exclude the implied warranties of merchantability and fitness. 
It seems anomalous that the roots can be severed, but not the branches. 



171 See, Trebilcock, footnote 154 supra, pp. 46-47. 

172 See, for example, the cases digested in Uniform Laws Annotated, Uniform 
Commercial Code, Vol. IA, sub. UCC 2-316; and the discussion in White & 
Summers, Handbook of the Law Under the Uniform Commercial Code 
(1972), ch. 12, and in Tracy, "Disclaiming and Limiting Liability for Com- 
mercial Damages" (1978), 83 Com. L.J. 8. 

173 See supra, this chapter, sec. 7(a), and Draft Bill s. 5.16(1). 

174 For example, White & Summers, footnote 172 supra, pp. 392 et seq. 



233 

Presumably, the inconsistency is due to an oversight. It may also be 
objected that public opinion has moved substantially since Article 2 was 
drafted, and that contractual attempts to disclaim liability for injury to 
the person should be outlawed altogether. We recognize the force of this 
reasoning. Nevertheless, we prefer to follow the Code's more modest pre- 
cedent, on the ground that specific questions of products liability are 
better left for disposition to a law on products liability. We would, how- 
ever, expand the scope of the Code language to embrace injury to the 
person caused by any type of goods, whether consumer goods or not, 
particularly since, in Ontario, The Consumer Protection Act 115 already 
regulates the use of disclaimer clauses in consumer sales, and because 
they were the subject of further recommendations in our Warranties 
Report. 116 We have been puzzled by the meaning of the phrase in UCC 
2-719(3), "where the loss is commercial". We have not been able to 
gain any guidance from the case law 177 and, in its absence, have concluded 
that the draftsman was referring to "economic losses". We believe, accord- 
ingly, that these words should be substituted for the Code language. 
Subject to these changes, we recommend the adoption of a provision com- 
parable to UCC 2-719(3) in the revised Act. 178 

We have also considered the desirability of a general prohibition of 
exemption clauses purporting to exclude liability for negligent acts. 179 
Such clauses are more commonly found in contracts for the supply of 
services than in contracts of sale, and they have generally encountered 
much judicial resistance. 180 However, they have not so far been declared 
to be contrary to public policy. When negligence is involved in the manu- 
facture or distribution of consumer goods, the consumer will normally 
find it simpler to sue for breach of warranty. This is so, partly because 
liability for breach of warranty is strict, and partly because The Consumer 
Protection Act 181 avoids the effectiveness of disclaimer clauses in con- 
sumer sales. It is, therefore, only in the context of non-consumer sales 
that a disclaimer of liability for negligent acts is likely to be of practical 
importance. 

Section 2(1) of the U.K. Unfair Contract Terms Act 1977 182 now 
outlaws disclaimer clauses purporting to exclude or restrict liability that 
would otherwise be imposed upon a business person for death or personal 
injury resulting from negligence. We have already discussed this issue. 



175R.S.O. 1970, c. 82 as am. 

n^Supra, footnote 156, pp. 61-62. 

177 See, for example, Billings v. Joseph Harvis Co., Inc. (1975), 27 N.C. App. 689, 
18 U.C.C. Rep. 359, aff'd (1976), 226 S.E. 2d 321 (N.C.S.Ct.); Morrow v. 
New Moon Homes, Inc. (1976), 548 P. 2d 279 (Alaska S. Ct.); Posttape As- 
sociates v. Eastman Kodak Co. (1976), 19 U.C.C. Rep. 832 (U.S. Ct. App. 
3d Cir.); D.O.V. Graphics, Inc. v. Eastman Kodak Co. (1976), 347 N.E. 2d 
561 (OhioC.P.). 

i78See, Draft Bill, s. 5.16(2). 

179 See the discussion of the English and Scottish Law Commissions in Law Com. 
No. 69, Scot. Law Com. No. 39, Exemption Clauses, Second Report (1975), 
Part III. 

180/foW., paras. 39-40. 

181R.S.O. 1970, c. 82 as am., s. 44a. 

I821977, c. 50 (U.K.). 



234 

Subsection (2) applies a similar rule to other types of loss or damage, 
unless the exculpatory clause satisfies the requirement of reasonableness. 183 
We have considered recommending the adoption in the revised Act of a 
provision similar to section 2(2) of the U.K. Act, but have been persuaded 
against it by a number of considerations. 

First, the departure from reasonable standards of care may be 
technical, and may not reflect moral blameworthiness. When this is 
coupled with the fact that the seller's liability for negligent conduct may 
be vicarious, one should not assume that the imposition of liability is 
required by some mandatory policy to punish wrongdoing. Secondly, the 
seller may have a legitimate interest in limiting the rather open-ended 
liability for consequential loss that the law would otherwise allow. It is 
difficult to assess the magnitude of this loss and to spread it adequately 
by means of the seller's insurance or pricing structure. The difficulty of 
predicting consequential losses arising from negligent conduct is just as 
great as that of predicting consequential losses for latent defects. Finally, 
a disclaimer for negligent conduct may be part of a legitimate scheme 
between the parties to rationalize their insurance coverage. It may be the 
easiest way to avoid duplication of coverage and to provide adequate 
insurance that protects both parties at the cheapest cost. 

Our abstentionist conclusion is not intended to bestow any kind of 
approval on exculpatory clauses involving negligence. These clauses will 
be controlled by the general provisions on unconscionability and good 
faith. It means, simply, that there will be no presumption of unconscion- 
ability, but that, as with respect to other types of disclaimer clause not 
involving claims for personal injury, the burden will rest with the ag- 
grieved party to make out his case. 

(iv) Disclaimer Clauses in Non-Privity Cases 

In chapter 6, we discussed the definition of express warranty. We 
recommended that this definition should not be confined to representa- 
tions and promises made by an immediate seller, but should embrace 
representations and promises made to a buyer by any other person in- 
volved in the manufacture or distribution of the goods. The question 
that now arises is the extent to which such persons should be able to avail 
themselves of disclaimer clauses where they are alleged to have breached 
a warranty. The question may arise in two situations. 

The first situation is where the original representation is itself quali- 
fied by a disclaimer clause, either as to its scope or as to the remedies 
available to the buyer. Since, in an action against the original representor, 
the ultimate buyer's claim is for breach of warranty, in principle the de- 
fendant should be entitled to rely on an exculpatory clause, subject to the 
usual test of unconscionability, just as he could if the parties were in 
privity with each other. The second situation arises where the original 



183 A similar requirement of reasonableness applies in the case of attempts to 
exclude the implied conditions of description, merchantability and fitness in 
a contract for the sale of non-consumer goods: the Unfair Contract Terms 
Act 1977, c. 50 (U.K.), s. 6(3). 



235 

representation, for example, a television commercial, contains no qualifi- 
cations, but where a disclaimer clause appears in the written guarantee by 
the original representor accompanying the goods. The answer to the 
question whether this disclaimer clause will protect the original representor 
should turn, it seems to us, in part on whether or not it was reasonable 
for the buyer to take the original representation at face value, and in 
part on whether the disclaimer clause came to the buyer's attention before 
he acted in reliance on the representation. If the buyer did learn of the 
disclaimer clause before he acted in reliance on the representation, then, 
once again, the representor should be entitled to invoke the disclaimer 
clause by way of defence. A more complex situation would arise where 
the buyer did not hear or see a representation made to the public before 
making his purchase, but where, pursuant to our earlier recommenda- 
tion, 184 such a representation is held to constitute an express warranty. 
In these circumstances, in our view, fairness requires that the original 
representor should not be entitled to rely on the disclaimer clause, unless 
it came to the buyer's attention or unless the buyer could reasonably have 
been expected to learn of the disclaimer before buying the goods or 
relying upon the representation. 

Since, for the first time, we are giving statutory recognition, in a gen- 
eral sales act, to the doctrine of collateral warranty, it would be helpful, 
in our view, to add provisions governing the admissibility of exculpatory 
clauses in circumstances such as those we have just described. We there- 
fore recommend 185 that the provisions in the revised Act on disclaimer 
clauses should apply to an express representation or promise made by a 
manufacturer or other distributor 

(a) where the modification, limitation or exclusion comes to the 
buyer's attention before he acts in reliance upon the representa- 
tion or promise; or 

(b) where the representation or promise is made to the public, 
and the buyer may reasonably be expected to learn of the 
modification, limitation or exclusion before buying the goods or 
relying upon the representation or promise. 

These recommendations are confined to express representations or prom- 
ises made directly by a prior seller to an ultimate buyer. They do not en- 
compass the problems that arise when the ultimate buyer seeks to rely on 
express and implied warranties obtaining between his seller and a prior 
party. It will be convenient to postpone discussion of these issues to 
chapter 1 of this Report. 

(v) Deemed Adoption of Disclaimer Clauses by Retailer 

Earlier in this Report, 186 we discussed the question of the extent to 
which a merchant seller should be deemed to adopt representations relat- 
ing to the goods that originated not from the merchant seller, but from a 



i84See, Draft Bill, s. 5. 10(1) (a). 
i85See, Draft Bill, s. 5.16(4). 
186 Supra, ch. 6, sec. A.2(d). 



236 

third party, typically the manufacturer or producer. Our recommendation 
was that there should be no general presumption of deemed adoption, 
except in so far as it was necessary to give meaning to the concept of 
merchantable quality; that is, the merchant seller should be deemed to 
adopt the promises or representations made on the container or label or 
other material accompanying the goods. 187 The question that now needs 
consideration is the extent to which a seller should be entitled to rely on a 
prior seller's exculpatory clauses, or other forms of limitation accompany- 
ing or preceding the goods. The problem is not dealt with either in The Sale 
of Goods Act or in Article 2, and the answer would appear to turn on gen- 
eral principles of contract law, and in particular on doctrines of privity and 
third party beneficiaries. 188 It would seem to follow that the retailer cannot 
rely on the prior seller's exculpatory clause, unless he can show that it 
was also incorporated in the terms of his own contract; or, possibly, that 
the prior seller acted jointly on behalf of himself and the retailer. 189 It is 
not usual for retail agreements to refer expressly to another person's dis- 
claimer clauses, or for a manufacturer to seek to protect the retailer as well 
as himself. What little case law there is on the point 190 suggests that the 
courts will generally be hostile to implying such clauses in the retail 
merchant's favour. 

A more sympathetic view was taken by the Massachusetts court in 
Taylor v. Jacobson. 191 This case involved the sale of a brand name cosmetic 
by a druggist to a consumer who proved allergic to this cosmetic. The 
Court observed as follows: 192 

As a practical matter, when a retail druggist sells (without express 
warranties or representations of his own) one of the many thousand 
manufactured products in his stock in trade, which has been asked for 
by trade name, it is a necessary inference that he adopts as his own 
any cautionary statements, disclaimers and limitations of warranties 
made (on the package and in accompanying circulars) by the manu- 
facturer who best knows the infirmities of his product. 



18 7See, Draft Bill, s. 5.13(1) (b) (v). 

188 As to which, see, generally, Treitel, The Law of Contract (4th ed., 1975), 
ch. 15; Fridman, The Law of Contract in Canada (1976), ch. 14. 

l89Compare, Scruttons Ltd. v. Midland Silicones Ltd., [1962] A.C. 446 (H.L.), 
dist'd in The New Zealand Shipping Co. Ltd. v. A. M. Satterthwaite & Co. Ltd. 
("The Eurymedon"), [1975] A.C. 154, [1974] 1 All E.R. 1015 (P.C.); Treitel, 
supra, pp. 427-31. 

!90Duesenberg and King, footnote 150 supra, p. 7.52.18, note 64, citing Sokoloski 
v. Splann (1942), 40 N.E. 2d 874 (Mass. Sup. Jud. Ct.); Jolly v. C.E. 
Blackwell & Co. (1922), 211 P. 748 (Wash. S. Ct.); Marino v. Maytag 
Atlantic Co. (1955), 141 N.Y.S. 2d 432 (Mun. Ct.). We are not aware of 
any Anglo-Canadian case in which the question has arisen in a similar con- 
text. The leading cases, cited in footnote 189 supra, involved exculpatory 
clauses in contracts for the carriage of goods. The other important difference 
between those cases and the problem considered in the text is that there is a 
clear contractual nexus between the buyer and the retail seller, whereas the 
nexus was not admitted by the plaintiffs who were suing the stevedores in the 
carrier cases. 

191(1958), 147 N.E. 2d 770 (Mass. Sup. Jud. Ct.), cited in Duesenberg and King, 
footnote 150 supra, p. 7.52.18. 

192/fc/rf., at p. 774. 



237 

It is obvious that the Court was moved by sympathy for the druggist's 
position. Where, on the facts, it is reasonable to infer that the seller has 
adopted the manufacturer's labelling as his own, it may seem fair that he 
should have the benefits as well as the burdens of such adoption. 193 In 
our view, however, it would be undesirable to elevate the Massachusetts 
judgment to a proposition of law, and to entrench it in the revised Act. In 
our Warranties Report 194 we rejected the suggestion that, because he is 
usually only a conduit pipe for the distribution of goods manufactured by 
others, a retailer should be relieved from compliance with the implied 
warranties. In that Report, we gave our reasons for this view. We consider 
these reasons to be just as valid in the case of non-consumer goods sold at 
retail. 

Accordingly, we recommend that the revised Act should not contain 
a statutory presumption to the effect that a prior seller's disclaimer shall 
enure in favour of a retailer by whom the goods are resold. 

RECOMMENDATIONS 

The Commission makes the following recommendations: 

1 . The conditions and warranties implied by section 1 3 of The Sale 
of Goods Act are generally satisfactory and should, subject to the 
matters discussed in recommendation No. 2, infra, be retained 
in the revised Act. 

2. In order to clarify and modernize the implied warranties and 
conditions contained in section 13 of the existing Act, the follow- 
ing changes and amendments should be made: 

(a) Consistent with our earlier recommendation that the distinc- 
tion between warranties and conditions should be eliminated, 
the condition of title should be described in the revised Act 
as a warranty. 

(b) The revised Act should provide that, where the seller retains 
a security interest in the goods, his implied warranty of title 
takes effect when the goods are delivered to the buyer. 

(c) The revised Act should continue the policy, now contained 
in section 13(a), that the seller must have a "right", and not 
merely a "power" to sell the goods. 

(d) The revised Act should not contain any provision reversing 
the decision in Microbeads A.G. v. Vinhurst Road Mark- 
ings, Ltd., [1975] 1 W.L.R. 218 to the effect that the war- 
ranty of quiet possession applies not only to acts committed 
by the seller or otherwise arising before the goods are de- 
livered to the buyer, but has equal application to acts lead- 



193 It should be noted however that Taylor v. Jacobson did not, strictly speaking, 
involve a disclaimer clause. Rather, the question was whether the retailer was 
entitled to rely on the manufacturer's directions and warnings concerning the 
use of the product. Other problems suggested by the court's reasoning are 
discussed in Duesenberg and King, footnote 150 supra, pp. 7.52.19-20. 

MSupra, footnote 156, pp. 72-73. 



238 

ing to a lawful interference with the buyer's quiet possession, 
that arise after this date. 

(e) Subject to the modifications noted below, section 13(c) of 
the existing Sale of Goods Act dealing with the warranty of 
freedom from encumbrances, should be retained in the re- 
vised Act: 

(i) the revised Act should not define the words "charge" 
or "encumbrance", but should incorporate, in addition 
to these words, the term "security interest"; 

(ii) the warranty of freedom from encumbrances should 
be expressed to take effect when the seller delivers the 
goods to the buyer; accordingly, the revised Act should 
provide that the goods "will be delivered free from any 
security interest . . .". 

(f) The revised Act should not contain a special provision, 
similar to UCC 2-312(3), relating to patent infringements 
and the like and restricted to merchant sellers. 

(g) The revised Act should include a provision, comparable to 
s. 12(2) of the U.K. Sale of Goods Act as amended, which 
provides for qualified title obligations where it is clear that 
the seller purports to transfer only a limited title. Disclaimer 
clauses should not, however, be prohibited; rather, the ex- 
cludability of the obligations should be governed by the 
test of unconscionability. 

3. The revised Act should contain a provision that corresponds to, 
but is a revision of, section 14 of the Ontario Sale of Goods Act 
dealing with the implied condition of description. This provision 
should make it clear, as does UCC 2-313(1 ) (b), that a descrip- 
tion of goods creates an express warranty that the goods conform 
to the description. 

4. A provision dealing with sales in a self-service store comparable 
to section 13(2) of the U.K. Sale of Goods Act as amended 
should be included in the revised Ontario Act. 

5. The revised Act should contain a provision to the effect that, 
subject to recommendation No. 6, infra, a description of the 
goods given by a third person is binding on the seller, only if by 
his words or conduct he has adopted the description as his own. 

6. Following UCC 2-314(2) (f), representations or promises ap- 
pearing on the container, label, or other material accompanying 
goods should be treated as part of the warranty of merchantabil- 
ity and as such should be binding on merchant sellers. 

7. A statutory definition of the word "description" is unnecessary, 
but use of the term should be avoided wherever possible. 

8. In order to dispel the impression that the implied warranties and 
conditions contained in section 15 of the existing Act operate 
only as limited exceptions to the doctrine of caveat emptor, the 



239 

preamble to the section should not be reproduced in the revised 
Act, and the warranties should be expressed in positive terms. 

9. Both the warranties of fitness and of merchantability should be 
retained in the revised Act, but their order of appearance should 
be reversed. 

10. The implied warranties of fitness and merchantability should not 
be extended to private sales. 

11. Subject to the following specific recommendations, the implied 
condition of merchantability contained in section 15.2 of the ex- 
isting Sale of Goods Act should be replaced by provisions similar 
to section 14(2) of the U.K. Sale of Goods Act as amended, and 
should include a definition of merchantability similar to that in 
section 62(1 A) of the U.K. Act. 

(a) As in section 14(2) of the U.K. Act, the requirement of a 
sale "by description" as a condition precedent to the opera- 
tion of the warranty of merchantability should be elimin- 
ated. 

(b) The implied warranty of merchantability should be restricted 
in the revised Act to cases where the seller is a person who 
deals in goods of the kind supplied under the contract of 
sale. 

*(c) The revised Act should not contain a provision, similar to 
section 14(5) of the amended U.K. Act, to the effect that, 
where a sale by a private seller is effected through an agent 
acting in the course of business, the implied terms of mer- 
chantable quality and fitness shall apply unless reasonable 
steps have been taken to inform the buyer that the sale is 
on behalf of a private seller. 

(d) The revised Act should contain a definition of "merchant- 
able quality". In order to make it clear that merchantable 
quality is not restricted to the functional or use value of the 
goods, the definition of the term, although based on section 
62(1 A) of the U.K. Sale of Gods Act as amended, should 
contain a reference to the quality and condition of the goods. 

(e) In order to reverse the result of the decision in Henry Ken- 
dall & Sons v. William Lillico & Sons Ltd., [1969] 2 A.C. 
31, the definition of merchantable quality, as in section 
62(1 A) of the amended U.K. Act, should require the goods 
to be fit for "the one or more purposes for which goods of 
that kind are commonly bought". 

(f) The revised Act should make it clear that the warranty of 
merchantability applies to used, as well as to new, goods. 

(g) the definition of merchantable quality in the revised Act 
should require that the goods will remain fit or perform 



*The Honourable Richard A. Bell dissents from this recommendation. See, foot- 
note 62, supra. 



240 

satisfactorily, as the case may be, for a reasonable length of 
time, having regard to all the circumstances. 

**(h) The implied warranty of merchantability should require that, 
with respect to new goods, spare parts and repair facilities, 
where relevant, will be available for a reasonable period of 
time. 

(i) Other specifications of merchantability, similar to those con- 
tained in clauses (a), (b), (d) and (e) of UCC 2-314(2), 
should be included in the definition of merchantable quality. 

(j) With respect to the effect of the buyer's examination of the 
goods, the revised Act should provide that the warranty of 
merchantability does not apply, 

(i) if the buyer has examined the goods before the contract 
was made, "with respect to any defect that such an 
examination ought to have revealed"; or 

(ii) as regards defects specifically drawn to the buyer's at- 
tention before the contract was made. 

12. There should be included in the revised Act a new warranty of 
fitness, similar to that contained in section 14(3) of the U.K. 
Sale of Goods Act as amended, but restricted to sales by a seller 
who deals in goods of the kind supplied under the contract of 
sale. 

13. The revised Act should not contain a separate section dealing 
with sales by sample; rather, those portions of section 16 of the 
existing Sale of Goods Act that retain their utility should be 
absorbed in other provisions of the revised Act. 

14. In the revised Act, the provision comparable to section 16(2) (c) 
of the existing Act should correct the anomaly under the present 
section, whereby the condition of merchantability is made ap- 
plicable whether or not the seller is a merchant with respect to the 
goods. 

15. The implied warranties in a lease of goods should be clarified 
and, with the exceptions of the implied warranties of title and 
freedom from encumbrances, the obligations of a lessor under a 
true lease of goods should be assimilated to those of a seller 
under a contract of sale of goods. Accordingly, the revised Act 
should provide: 

(a) that the provisions relating to express warranties and the 
implied warranties of description, merchantability and fit- 
ness apply to a contract for the lease of goods; and 

(b) that, in addition, the lessor warrants, 

(i) that he has the right to lease the goods; and 
(ii) that the lessee will have quiet possession of the goods 
during the period of the lease. 

16. In order to provide constructional guidance where the express 



**The Honourable J. C. McRuer and Mr. W. Gibson Gray dissent in part from 
this recommendation. See, footnote 98, supra. 



241 

and implied terms of a contract of sale appear to be in conflict, 
a provision comparable to UCC 2-317 dealing with cumulation 
and conflict of express and implied warranties should be adopted 
in the revised Act in place of section 15.4 of the existing Act. 

***17. Clauses excluding or restricting the statutory warranties implied 
in the buyer's favour and the buyer's remedies for breach of the 
seller's statutory warranties, should not be prohibited in com- 
mercial sales; rather, such disclaimer clauses should be permitted, 
subject to the doctrine of unconscionability. The revised Act 
should contain an explicit provision to this effect. 

18. A provision, similar to UCC 2-316(1), dealing with construc- 
tion of contractual terms that tend to limit or negate an express 
warranty, should be included in the revised Act. This new pro- 
vision should not, however, contain any reference to the parol 
evidence rule. 

19. Provisions similar to UCC 2-316(2) and (3) (a), which provide 
specific guidelines concerning the manner and circumstances in 
which the implied warranties may be excluded or modified, should 
not be included in the revised Act. 

20. The revised Act should contain a provision, similar to UCC 
2-719(3), deeming an exclusion or limitation of damages for 
breach of warranty to be prima facie unconscionable in the case 
of injury to the person, but not in the case of economic loss. Un- 
like UCC 2-719(3), however, the provision in the revised Act 
should not be limited to injury to the person caused by consumer 
goods, but should embrace injury to the person caused by any 
type of goods. 

21. The revised Act should not contain a provision prohibiting dis- 
claimer clauses that purport to exclude liability for all negligent 
acts; rather, such clauses should be controlled by the general 
provision on unconscionability. 

22. With respect to disclaimer clauses in non-privity cases, there 
should be included in the revised Act a provision to the effect 
that the provisions of the Act on disclaimer clauses should apply 
to an express representation or promise made by a manufact- 
urer or distributor not in privity with the subsequent buyer, 

(a) where the modification, limitation or exclusion comes to the 
buyer's attention before he acts in reliance upon the repre- 
sentation or promise; or 

(b) where, in the case of a representation or promise made to 
the public, the buyer may reasonably be expected to learn 
of the modification, limitation or exclusion before buying 
the goods or relying upon the representation or promise. 

23. The revised Act should not contain a statutory presumption to 
the effect that a prior seller's disclaimer shall enure in favour of 
a retailer by whom the goods are resold. 



***The Honourable Richard A. Bell dissents in part from this recommendation. See, 
footnote 165, supra. 



CHAPTER 10 



EXPRESS AND IMPLIED WARRANTIES 
AND THE DOCTRINE OF PRIVITY 



1. The General Issue 

The preceding chapter concerned itself with two topics: namely, the 
statutory warranties implied by law in the buyer's favour under a contract 
of sale; and, the effectiveness of disclaimer clauses excluding or restricting 
the seller's liability for breach of express and implied warranties. The 
important question that we consider in the present chapter is whether a 
warranty, express or implied, given by a seller to his buyer, should enure 
in favour of a third party to whom the goods are resold by the buyer. The 
most familiar example of this phenomenon is reflected in the typical retail 
setting: the retailer acquires the goods from the manufacturer or dis- 
tributor and resells them to his customer. If the goods prove defective, the 
retail buyer will have his warranty remedies against the retailer, unless 
they have been successfully excluded, and the retailer in turn will have 
similar rights against the manufacturer or distributor. The critical question 
is whether the retail customer should be permitted to sue the manufacturer 
or distributor directly for breach of warranty, thereby, if he wishes, by- 
passing the retailer completely. The same question will arise in any other 
vertical relationship in which the goods have passed through successive 
hands, and a subsequent buyer seeks to sue a prior seller for breach of 
warranty. 

Existing law would answer this question in terms of the doctrine of 
privity of contract. Assume that A, a manufacturer, sells goods to B, a 
retail seller. Assume also that B sells the goods to C, a customer, and 
that the goods prove defective. Since C was not a party to the contract 
of sale between A and B, A has breached no warranty obligations owing 
to C, and C's recourse remains limited to an action against B. If the 
defective goods have harmed C or his property, and A is found to have 
been negligent, C may have a remedy in tort under the doctrine of 
Donoghue v. Stevenson; 1 this possibility, however, has no bearing on A's 
warranty liability. Anglo-Canadian law recognizes an apparent exception 
to this basic doctrine where A has issued an express warranty in C's 
favour. It is, however, not a real exception since, even in such cases, A's 
liability is based on the concept of a collateral contract between the two 
parties. We have dealt with this question in an earlier chapter 2 and have 
recommended that express warranty should be defined in the revised Act 
so as to embrace representations and promises made by a remote seller 
in favour of a subsequent buyer. We need not, therefore, pursue this 
matter again. It is necessary, however, to distinguish this situation from the 
situation in which a prior seller, A, makes an express representation con- 
cerning, for example, the authenticity of a painting, to his immediate 
buyer, B. If B sells the goods to a subsequent buyer, C, the question 

i[1932] A.C. 562 (H.L.). 
2 Supra, ch. 6, sec. A. 

[243] 



244 

arises whether C should be able to sue A in respect of the express war- 
ranty given by A to B. Our recommended draft provision deals with this 
issue. 

The other vital issue that remains is whether the "citadel of privity" 
should also be breached so as to enable C to sue A for breach of implied 
warranty. We examined this issue in the consumer context in our Report 
on Consumer Warranties and Guarantees? We recommended 4 that a 
manufacturer of consumer goods should be deemed to give a consumer 
buyer implied warranties of the same type as the statutory warranties 
that run from the retailer to the consumer buyer, and that the manufac- 
turer should be subject to the same remedies in an action by the consumer 
buyer as would the retailer. These recommendations would have been sub- 
stantially implemented by Bill HO, 5 and are fully reflected in Saskat- 
chewan in The Consumer Products Warranties Act. 6 Our recommenda- 
tions in the Warranties Report were confined to consumer transactions, 
and we expressed no views on the desirability of extending them to non- 
consumer sales. This is the question to which we now turn our attention. 

Before presenting the several arguments on both sides of the line, 
one crucial distinction must be noted at the outset. As described in the 
Warranties Report, 1 the great majority of American courts impose on a 
manufacturer and other persons forming part of the distributive chain 
liability for defective goods causing injury to person or property. This 
liability is imposed either on a tort basis, or on a theory of implied war- 
ranties running from the manufacturer to the injured party. We may con- 
veniently refer to these cases as products liability cases. We recognize, as 
we already recognized in our Warranties Report, 9, that defective products 
that cause injury to person or property fall into a separate category, and 
that they raise a different range of issues. They are, therefore, substantially 
excluded from the following discussion, particularly since we have em- 
barked on a separate study of this branch of the law. 9 Our primary con- 
cern is with defective goods that cause economic losses, although, as will 
be apparent from our draft provision, 10 our tentative view is that a person 
who suffers damage by reason of a defective product should have, in ad- 

3 Ontario Law Reform Commission, Report on Consumer Warranties and Guar- 
antees in the Sale of Goods (1972), ch. 5. 

Vbid., pp. 76-77. 

5 See, The Consumer Products Warranties Act, 1976, introduced by Bill 110, 
3rd Session, 30th Legislature (Ont.), ss. 3(2), 4, 5, and 7(2). Excluded were the 
statutory warranty of fitness [s. 6] and the warranties applicable in a sale 
by sample [s. 3(2) (a)]. Bill 110 was not enacted. See, also, The Ontario New 
Home Warranties Plan Act, S.O. 1976, c. 52, ss. 13, 14, for a more circum- 
scribed example of legislation breaching traditional doctrines of privity. 

6 S.S. 1976-77, c. 15, ss. 13-14. See now, also, the New Brunswick Consumer 
Product Warranty and Liability Act, S.N.B. 1978, c. C-18.1, s. 23. 

iSupra, footnote 3, pp. 67-69. See, also, Waddams, Products Liability (1974), 
ch. 12. 

»I bid., p. 71. 

9 For the past two years, the Commission has been engaged in a study of the 
law governing products liability. The Products Liability Project is being car- 
ried out under the directorship of Professor Stephen M. Waddams of the 
Faculty of Law, University of Toronto. 
lOSee, Draft Bill, s. 5.18(1) (c) and (2). See, also, infra, this ch., sec. 3(f). 



245 

dition to any rights he may have in tort, the right to recover in respect 
of all types of injury, including injury to the person or property, for 
breach of warranty. The issues relating to economic loss caused by de- 
fective goods have been extensively canvassed in American case law 11 
and in scholarly literature. 12 The availability of these sources considerably 
simplifies our task of presenting the arguments both in favour of and 
in opposition to the extension of warranty liability. 13 

The following arguments have been marshalled by way of opposi- 
tion to an extension of warranty liability: 

(a) There is a vital difference between holding a manufacturer 
responsible to an ultimate consumer for a defective product causing 
personal injury or damage to other property, and imposing warranty 
liability for a defective product that only results in an economic 
loss. 14 Liability in the first case is based on broad grounds of public 
policy: that is, the maunfacturer's superior ability to absorb such 
losses; the desirability of internalizing the cost of product accidents; 
and, the deterrent effect of a doctrine of strict liability. These argu- 
ments do not hold true for defective products resulting in economic 
losses, at least so far as they involve non-consumer goods. 

(b) Since Anglo-Canadian law has so far shown a strong re- 
luctance to permit recovery for pure economic losses resulting from 
negligent acts, 15 other than under the Hedley Byrne doctrine, 16 it 
would be anomalous to single out the distribution of defective pro- 
ducts for special treatment. 



nSee, for example, Santor v. A. M. Karagheusian, Inc. (1965), 207 A. 2d 305 
(N.J. Sup. Ct.); Seeley v. White Motor Co. (1965), 403 P. 2d 145 (Cal. Sup. 
Ct.) Morrow v. New Moon Homes, Inc. (1976), 548 P. 2d 279 (Alaska Sup. 
Ct.). The Morrow case considers all the intervening developments. 

12 See, for example, White & Summers, Handbook of the Law Under the Uniform 
Commercial Code (1972), s. 11-5 at p. 334; Note, "Economic Loss in Products 
Liability Jurisprudence" (1966), 66 Colum. L. Rev. 917 at pp. 964-65; Com- 
ment, "The Vexing Problem of the Purely Economic Loss in Products Liability: 
An Injury in Search of a Remedy" (1972), 4 Seton Hall L. Rev. 145, 154; 
Annot., "Privity of Contract as Essential in an Action Against Remote Manu- 
facturer or Distributor for Defects in Goods Not Causing Injury to Person or 
Other Property" (1967), 16 A.L.R. 3d 683, 687. 

13 Reference should also be made to trie important Quebec jurisprudential develop- 
ments as reflected in the recent decision of the Supreme Court of Canada in 
General Motors Products of Canada Ltd. v. Leonis Kravitz (January 23, 1979, 
as yet unreported), and the earlier authorities cited therein. French law also 
recognizes an "action directe" by the ultimate buyer against the manufacturer 
of a defective product: see Amos & Walton, Introduction to French Law (3rd 
ed., 1967), pp. 362-63. 

14 Compare, Chief Justice Traynor's majority judgment in Seeley v. White Motor 
Co. (1965), 403 P. 2d 145 (Cal. Sup. Ct.), at pp. 151-52. 

15 See, inter alia, the extended discussions in Rivtow Marine Ltd. v. Washington 
Iron Works, [1974] S.C.R. 1189, (1972), 40 D.L.R. (3d) 530 (S.C.C.) ; S.C.M. 
(U.K.) Ltd. v. W. J. Whittal & Son Ltd., [1971] 1 Q.B. 337 (C.A.); Atiyah, 
"Negligence and Economic Loss" (1967), 83 L.Q.R. 248. 

^Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd., [1964] A.C. 465 (H.L.), 
appl'd in Canada, inter alia, in Haig v. Bamford, [1977] 1 S.C.R. 466, (1975), 
72 D.L.R. (3d) 68 (S.C.C). 



246 

(c) Imposing liability on a manufacturer for defective products 
causing only economic losses would enormously extend the scope 
of his enterprise risks, in terms of both amount of claims and num- 
ber of potential claimants. Such an imposition would make it difficult 
for a manufacturer to estimate his costs accurately, especially if 
consequential damages were also allowed. 

(d) The manufacturer would find it very difficult to procure 
insurance to cover such liability. 

(e) At least in the case of commercial transactions, the buyer 
is in a better position to assess the consequences to him of a defec- 
tive product. If he is sufficiently concerned, he can seek specific 
guarantees from the retailer or manufacturer or procure his own 
insurance against consequential losses. 

The arguments supporting the extension of warranty liability proceed 
from the following premises : 

(a) In the case of many finished products, the position of the 
non-consumer buyer is not very different from that of the consumer 
buyer: in both cases, the buyer relies heavily on the manufacturer's 
reputation, and the manufacturer, in turn, aims much of his adver- 
tising directly at the ultimate buyer. In both cases, the retailer is often 
little more than a conduit pipe for the manufacturer's product. It is 
artificial, therefore, to rely on privity notions to measure the scope 
of the manufacturer's implied warranties; sheltering behind the doc- 
trine merely conceals the real nature of the problem. 

(b) The distinction between express and implied warranties is 
often a fine one. Both historically and functionally, they frequently 
merge into one another. This is true, for example, of the warranty 
of description, which the courts have treated both as an express and 
implied warranty. 17 It is also true of the implied warranty of mer- 
chantability, which is merely a judicial extrapolation of the warranty 
of description. 18 

(c) It is artificial to distinguish between economic losses and 
other types of loss, because it is often accidental whether a defective 
product causes one or other type of loss, or both. Moreover, economic 
losses can be as serious for a subsequent buyer as losses resulting 
from physical harm. 19 At best, the distinction is only relevant in 
determining the validity of a manufacturer's disclaimer clause. 

(d) Negligence law is an inappropriate analogy, since it seeks 
to protect a much wider range of persons and applies to almost any 
type of activity. Warranty liability has always been governed by its 
own principles. The difficulty of insuring against economic losses 



l7Compare, Andrews Bros. Ltd. v. Singer & Co. Ltd., [1934] 1 K.B. 17 (C.A.). 

iSSee, for example, the judgment of Mellor, J., in Jones v. Just (1868), L.R. 
3 Q.B. 197, at pp. 205, 207. 

!9See the dissenting judgment of Peters, J., in Seeley v. White Motor Co., foot- 
note 11 supra, at p. 155. 



247 

arises just as often in claims by the immediate buyer against the 
manufacturer. The extension of the scope of the manufacturer's lia- 
bility involves, therefore, only a change in quantity, and not in kind. 
Moreover, the dangers of untoward liability can be avoided by 
careful legislative draftsmanship, and by permitting a manufacturer 
to rely on a disclaimer clause accompanying the goods or forming 
part of the contract of sale between him and his immediate buyer, 
where such a clause would otherwise be unobjectionable. 20 

(e) To deny the ultimate buyer a right of recourse against the 
manufacturer may sometimes deny him any remedy; for example, 
where the immediate seller is not worth suing, or has become bank- 
rupt or gone out of business. These are, in fact, the most important 
reasons for a buyer seeking to pursue a manufacturer because of 
defective goods. 

(f) Permitting direct action against the manufacturer will avoid 
circuity of actions and expedite the settlement of legitimate claims. 

2. Our Own Position 

The Commission supports in principle the desirability of extending 
the express and implied warranties of a seller in favour of a subsequent 
buyer. After careful deliberation, however, we have decided not to take 
a firm position on the issue at this time, but to postpone a final decision 
until interested parties have had an opportunity to express their views. 
We adopt this position primarily because of the novelty and importance 
of the issue in Ontario, and because of the absence of hard data on the 
probable impact of such an extension of warranty liability. The only 
precedent in Canada appears to be the farm implement and agricultural 
machinery legislation in the Prairie Provinces and Prince Edward Island. 21 
These are useful guides if one is considering an incremental approach, but 
they provide little assistance in seeking to assess the impact of a general 
change in warranty law. 

There appears to be an equal paucity of precedents in other common 
law jurisdictions. American law is still in a state of flux. We noted in our 
Warranties Report, 22 the decision of the New Jersey Supreme Court in 
Santor v. A. & M. Karagheusian, Inc. 23 In that case, the Court extended 
the concept of tortious liability for personal injury and physical damage 
caused by a defective product to purely economic losses in the case of 
consumer goods. This extension was disapproved in the majority judg- 
ments of the Supreme Court of California in Seeley v. White Motor Co. 24 



20This solution would answer the problem that troubled Lord Reid in Young & 
Marten Ltd. v. McManus Childs Ltd., [1969] 1 A.C. 454 (H.L.), 467, in con- 
templating the possibility of the purchaser of a new home being permitted to 
sue directly the manufacturer of defective roofing tiles. 

21 See, Report on Consumer Warranties and Guarantees in the Sale of Goods, 
footnote 3 supra, pp. 96 et seq. 

22Jbid., p. 68. 

23(1965), 207 A. 2d 305 (N.J. Sup. Ct.). 

24(1965), 403 P. 2d 145 (Cal. Sup. Ct.). 



248 

and has been rejected by the majority of other courts. 25 American courts 
have been equally divided with respect to whether the remote seller can 
be sued on a theory of implied warranty running with the goods. On the 
strength of the recent decision of the Supreme Court of Alaska in 
Morrow v. New Moon Homes, Inc., 26 there appears, however, to be a 
trend in favour of allowing consumer claims, subject to the usual defences 
available to a seller under the Uniform Commercial Code. The question 
of the manufacturer's liability to the ultimate buyer in non-consumer trans- 
actions remains at large. 

Finally, reference should be made to the important recommendations 
in the New South Wales Working Paper on The Sale of Goods. 21 This 
Working Paper, basing itself in part on our Warranties Report, recom- 
mended 28 extending the warranty of merchantable quality in favour of a 
remote buyer, but without confining it to consumer goods. The remote 
buyer's claim would, however, generally be subject to any defence that 
would have been available to the remote seller in an action for breach 
of warranty by the immediate buyer. We consider other aspects of the 
New South Wales recommendations more fully below. 

3. Draft Provision and Consequential Issues 

While we have decided to postpone a final recommendation, we 
have thought it useful to insert a tentative provision in the Draft Bill. We 
do so in order to focus attention both on the main issue and on the many 
consequential issues that would arise for decision if it were decided to 
permit direct warranty recovery against a prior seller. 

Our recommended draft provision is contained in section 5.18 of the 
Draft Bill, and reads as follows: 

(1) In this section 

(a) 'goods' includes goods that have been converted into, in- 



25For example, Bright v. Goodyear Tire & Rubber Co. (1972), 463 F. 2d 240 
(9th Cir.): in this case, there was no recovery from the manufacturer for a 
defective tire when no physical injury was alleged; Eli Lilly & Co. v. Casey 
(1971), 472 S.W. 2d 598 (Tex. Civ. App.): in this case, a buyer of a weed 
control chemical was held not entitled to recover economic loss from the 
manufacturer. Also, see Melody Home Mfg. Co. v. Morrison (1970), 455 S.W. 
2d 825 (Tex. Civ. App.); Rhodes Pharmacal Co. v. Continental Can Co. 
(1966), 219 N.E. 2d 726 (111. C.A.); Price v. Gatlin (1965), 405 P. 2d 502 
(Ore. Sup. Ct.); Koellmer v. Chrysler Motors Corp. (1970), 276 A. 2d 807 
(Conn. Cir.); General Motors Corp. v. Halco Instruments, Inc. (1971), 185 
S.E. 2d 619 (Ga. Ct. App.). 

26(1976), 548 P. 2d 279 (Ala. Sup. Ct.). See, also, Lynne Carol Fashions, Inc., 
v. Cranston Print Works Co. (1972), 453 F. 2d 1177 (3rd Cir.); Gherna v. 
Ford Motor Co. (1966), 246 Cal. App. 2d 639; Manheim v. Ford Motor Co. 
(1967), 201 So. 2d 440 (Fla.); Hoskins v. Jackson Grain Co. (1953), 63 So. 
2d 514 (Fla.); Spence v. Three Rivers Builders & Masonry Supply, Inc. (1958), 
90 N.W. 2d 873 (Mich.); Ford Motor Co. v. Grimes (1966), 408 S.W. 2d 
313 (Tex. Civ. App.). 

27Law Reform Commission, New South Wales, Working Paper on The Sale of 
Goods (1975). 

l&Ibid., Recommendations 15.12-15.15; and New South Wales Draft Bill, Part 
IIA, ss. 20H to 20L. 



249 

corporated in, or attached to, other goods or that have been 
incorporated in or attached to land; 

(b) immediate buyer' means a buyer who buys goods from a 
prior seller; 

(c) 'injury' means injury to the person, damage to property, 
or any economic loss; 

(d) 'prior seller' means a seller who sells goods that are sub- 
sequently resold; 

(e) 'subsequent buyer' means a buyer who buys goods that 
have previously been sold by a prior seller to an immediate 
buyer. 

(2) Without prejudice to a subsequent buyer's rights under section 
5.10, a prior seller's warranty, express or implied, and any remedies 
for breach thereof, enure in favour of any subsequent buyer of the 
goods who suffers injury because of a breach of the warranty. 

(3) A subsequent buyer's rights under subsection 2 are subject 
to any defence that would have been available to such prior seller 
in an action against him for breach of the same warranty by his 
immediate buyer. 

(4) The measure of damages recoverable by a subsequent buyer 
for breach of warranty by a prior seller shall be no greater than the 
damages that the immediate buyer could have recovered from such 
prior seller if a successful claim had been brought against the im- 
mediate buyer by the subsequent buyer for breach of the same war- 
ranty and the immediate buyer had made a claim over against the 
prior seller. 

(5) This section applies notwithstanding any agreement to the 
contrary. 

Subsection (2) establishes the basic principle, and was inspired by 
the comparable, but not identical, language in UCC 2-318 29 and sections 
201(2) and 20K(2) of the New South Wales Draft Bill. 30 The expression 
"enure in favour of" suggests that the warranty rights of the subsequent 
buyer are derivative, and this theory is consistent with the defences open 
to the prior seller pursuant to subsection (3). However, this conceptualiza- 
tion of the buyer's right may be regarded by some as unduly restrictive. 



29UCC 2-318, Alternatives A, B and C, all begin with the phrase, "A seller's 
warranty whether express or implied extends to . . .". Apparently, none of the 
alternatives, as so far construed by American courts, includes simple claims 
for economic losses. See, further, Report on Consumer Warranties and Guar- 
antees in the Sale of Goods, footnote 3 supra, pp. 68-69. 
30 These sections provide as follows: 
Section 201(2) 

A warranty of merchantable quality enures for the benefit of a remote 
buyer. 
Section 20K(2) 

A warranty of title enures for the benefit of a remote buyer. 



250 

It may be preferable to base the buyer's rights on a simple theory of 
implied warranties running directly from the prior seller. We return to 
this point below. The other consequential issues raised by the draft section 
are as follows. 

(a) TYPES OF SELLER 

Our draft provision draws no distinction between merchant and non- 
merchant sellers, or between manufacturers and other types of merchant- 
sellers. We believe this to be the better approach. The prior seller whom 
it is sought to reach will usually be a merchant seller, but this will not 
always be true; for example, where a subsequent buyer complains of 
breach of the warranty of title committed by the prior seller of a motor 
vehicle. 31 Like the New South Wales Draft Bill, our provision is designed 
to embrace all members of the distributive chain, and to leave it to them 
to sort out liability among themselves. It would, no doubt, be possible to 
restrict the definition of "prior seller" to the manufacturer, but this ap- 
proach, as was noted in the Warranties Report, 32 would create difficult 
problems of definition. 

(b) TYPES OF SUBSEQUENT BUYER AND MEMBERS OF BUYER'S 
HOUSEHOLD 

As in the case of sellers, we would draw no distinction between the 
different types of buyer. Even if Ontario adopts consumer products war- 
ranties legislation, there will be no harm in continuing to include consumer 
buyers in the warranty provisions of the revised Sale of Goods Act. 33 The 
New South Wales provisions also extend protection to members of an im- 
mediate or remote buyer's household in the case of claims for breach of 
the warranty of merchantability, 34 thus breaching the walls of horizontal 
as well as vertical privity. While such a provision may be entirely appro- 
priate in a Consumer Products Warranties Act, 35 or in a statute dealing 
generally with products liability claims, we entertain doubts about the 
wisdom of including it in a revised Sales Act whose primary concern is 
with the rights of buyers. Accordingly our draft section does not deal with 
questions of horizontal privity. 

(c) TYPES OF PRODUCT 

Once again, our draft provision draws no distinction. We have 



3 *Compare, Oscar Chess Ltd. v. Williams, [1957] 1 All E.R. 325 (C.A.). Com- 
pare, also, Beale v. Taylor, [1967] 3 All E.R. 253 (C.A.); the case involved 
misdescription of a motor vehicle as the result of a "transplant" of part of the 
body performed by an earlier owner. 

^Supra, footnote 3, p. 72. 

33 Although in the case of conflict the consumer warranty provision would pre- 
sumably prevail. 

34 Law Reform Commission, New South Wales, Working Paper on The Sale of 
Goods (1975), Draft Bill, s. 201(3). Section 20J also extends the benefit of 
the implied warranty of fitness, but apparently only to members of the house- 
hold of the immediate buyer. 

35 See, Report on Consumer Warranties and Guarantees in the Sale of Goods, 
footnote 3 supra, ch. 5.2. 



251 

considered the possibility of restricting the prior seller's liability to finished 
goods, or to goods intended to reach the subsequent buyer in the condition 
in which they left the prior seller. In our view, however, such a restriction 
would not be desirable. If the question at issue is whether the goods were 
defective at the time they left the prior seller's hands, it seems to us 
that it ought not to matter whether the goods were in a processed or un- 
processed form, 36 or whether they consisted of components or accessories 
intended to be installed in other goods. 37 Such distinctions could create 
serious anomalies and substantially reduce the value of a provision similar 
to section 5.18 of the Draft Bill. 38 

This question should not be confused with a very different issue: 
namely, whether the prior seller should be held accountable for an un- 
authorized or unexpected use or description of the product, made or given 
by the person to whom it was sold or by some other person in the dis- 
tributive cycle. The answer to this question should clearly be no. The 
fundamental theory of the draft provision is that the prior seller is only 
responsible for defects in the goods that existed at the time that they left 
him. 

(d) TYPES OF WARRANTIES 

We have already discussed the context in which express warranties 
will be relevant, and we now consider to what extent the draft provision 
should distinguish between various types of implied warranties. Unlike 
the New South Wales draft, our provision does not distinguish between 
the various implied warranties that enure in favour of a subsequent buyer. 
The New South Wales Working Paper 39 excludes the warranty of fitness. 
The authors did not envisage circumstances in which it could apply be- 
tween the prior seller and a subsequent buyer, unless the subsequent 
buyer communicated his special needs directly to the prior seller. In such 
a case, they reasoned, the subsequent buyer could sue the prior seller 
for breach of express warranty. The notion that the ultimate buyer may 
not wish, or be able, to invoke the implied warranty of fitness seems to 
us a dubious assumption, and one that is not consistent with the broad 
meaning attached to the warranty of fitness in recent decisions. 40 In any 
event, whether or not this warranty applies will turn on the particular 



36Compare, Henry Kendall & Sons v. William Lillico & Sons Ltd., [1969] 2 
A.C. 31 (H.L.). 

37In the case of motor vehicles, it is not unusual for the vehicle manufacturer 
to exclude warranty responsibility for designated accessories (for example, 
tires) and to remit the retail buyer to the warranties given by the accessory 
manufacturer. See, further, Report on Consumer Warranties and Guarantees 
in the Sale of Goods, footnote 3 supra, pp. 84-85. 

38 Assume A, a retail buyer, purchases a truck from dealer, B. The truck is 
assembled by C and includes tires manufactured by D. If the tires are defective, 
it would be anomalous if A could sue B and C, but not D. It would be 
equally anomalous if B, upon being sued by A, were not able to join D as a 
third party. In both cases, the consequences could be serious if C is insolvent 
or no longer in business. 

^Supra, footnote 34, para. 6.51(b). 

40 See, especially, Christopher Hill Ltd. v. Ashington Piggeries Ltd., [1972] A.C. 
441 (H.L.). 



252 

facts of a case. The fact that the implied warranty of fitness may not apply 
in all circumstances is not, in our view, a sufficient justification for ex- 
cluding the warranty entirely. The same observation holds true of the 
other implied warranties. 

(e) buyer's remedies for breach of warranty 

Section 20L(1) of the New South Wales Draft Bill restricts the 
buyer's remedies against a prior seller to an action for damages. This 
suggests that, as against the prior seller, the buyer will not be entitled 
to reject the goods, however defective, even though he would have been 
entitled to reject the goods vis-a-vis his immediate seller. 41 This could give 
rise to an anomalous position. The buyer, upon rejection, would be 
entitled to sue his immediate seller for total failure of consideration. 
Section 20L(1) would, however, remit him to a claim for damages against 
the prior seller, which presumably would be assessed on the footing that 
the buyer, being unable to reject the goods, 42 still had the goods. There 
may, of course, be many circumstances where it is too late for the buyer 
to reject the goods; for example, where the goods have changed their 
character, or have been processed or transformed since leaving the original 
seller's possession. This is not the same as saying that no right of rejection 
should exist at any time. 43 Subsection (2) of our draft provision does not 
attempt to spell out the subsequent buyer's remedies against the prior 
seller. It leaves these remedies to be worked out by analogy to the 
remedies available against the immediate seller, and in light of the overall 
objective of the section to avoid circuity of actions. 

(f ) TYPES OF INJURY 

Here again, our draft provision draws no distinction between the 
types of claim maintainable against the prior seller, and those maintain- 
able against the immediate seller. This position seems to us desirable in 
the interests of evenhanded treatment of immediate and prior sellers. 
Under existing law, under the rule in Hadley v. Baxendale, 44 the buyer of 
a defective product is entitled to recover from his seller all substantially 
foreseeable damages, direct or consequential, whether they arise out of the 
diminished value of the goods, loss of bargain, or injury to person or 
property. It would be anomalous, in our opinion, if the prior seller's 
liability towards the subsequent buyer were to be measured by a lower 
standard than his liability towards the immediate seller. 



4iCompare, Reece v. Yeager Ford Sales Inc. (1971), 184 S.E. 2d 727 (W.Va. 
Sup.Ct.App.); and Emmons v. Durable Mobile Homes Inc. (1974), 521 S.W. 
2d 153 (Tex. Civ. App.). 

42The position would become still more complicated if the immediate seller also 
purported to reject the goods. 

43 A right of rejection in favour of the subsequent buyer was recognized in 
General Motors Products of Canada Ltd. v. Leonis Kravitz, footnote 13 supra. 
While the decision was based on Quebec law, the reasoning that led the Su- 
preme Court of Canada to this conclusion is equally apposite in a common 
law context. 

44(1854), 9 Exch. 341, as qualified by The Heron II, [1969] 1 A.C. 350 (H.L.). 



253 

This would be particularly true if consequential damages were not 
recoverable from the prior seller, even though he had not sought to 
restrict his liability by a disclaimer clause. The following example illus- 
trates our reasoning. A farmer purchases seed from a local distributor 
which, owing to a defect, fails to germinate. He sues both the distributor 
and the producer claiming direct and consequential losses. The distributor 
joins the producer as a third party. The farmer is successful in his suit 
against the distributor, and the distributor is successful in his claim over 
against the producer. Ignoring the impact of any disclaimer clauses, the 
producer's liability to the distributor will be governed by the same damage 
principles as obtain between the farmer and the distributor. There would, 
therefore, be little point in limiting the farmer's potential recovery against 
the producer to direct damages, since this would not protect the producer 
against the distributor's higher claim. In our view, the accidents of litiga- 
tion should not affect the basic principles governing an assessment of 
damages against the prior seller. 45 

(g) RESTRICTIONS BINDING ON THE BUYER 

Our preceding remarks have no bearing on whether the prior seller 
should be entitled to restrict, or even exclude entirely, his warranty 
liability to a subsequent buyer. Consistently with the general theoretical 
framework of the draft provision, we are firmly of the view that his 
position should be no worse than if he were in direct privity with the 
subsequent buyer. The question that has troubled us considerably is how 
this goal is best achieved. 

There are at least two possible models. One is to make the subse- 
quent buyer's claim subject to any disclaimer clause by the prior seller 
or to other special circumstances 46 surrounding the original sale, provided 
that reasonable steps have been taken to bring the disclaimer clause or 
such circumstances to the subsequent buyer's attention prior to, or at the 
time of, his purchase. 47 The other, and much broader, approach is to make 
the subsequent buyer's claim subject to all, or most of, the defences that 
could have been raised if an action against the prior seller had been 
brought by the immediate buyer who purchased the goods from the prior 
seller. It seems to us that both models have their strengths and weaknesses. 

The second model is the model adopted in the New South Wales 
Working Paper, and adopted also in section 5.18(3) of our Draft Bill 



45 The danger of the prior seller being held responsible for consequential dam- 
ages has been repeatedly stressed by American scholars, and has even influ- 
enced those courts that favour lifting the privity barrier in consumer claims. 
In Morrow v. New Moon Homes, Inc., footnote 11 supra, at p. 292, n. 42, 
the Court was careful to reserve its position on the admissibility of claims for 
consequential losses. The fact that the manufacturers would be exposed to 
the same danger in a "vouching over" action by the buyer from him, seems to 
be frequently overlooked. 

46 For example, defects disclosed to the first buyer or goods sold to him as 

"seconds". 
47 Compare, the Morrow case, footnote 1 1 supra, at p. 292. 



254 

for purposes of discussion. 48 There is, however, a difference between the 
New South Wales draft provision 49 and the provision we have tentatively 
put forth. The New South Wales provision excludes from the available 
defences "any agreement, release or other thing made or done, or judg- 
ment obtained or suffered" between the prior seller and his immediate 
buyer, or other intermediate party, subsequent to the original contract of 
sale between the prior seller and the immediate buyer; our provision, on 
the other hand imposes no such restriction. In our tentative view, the 
New South Wales provision tips the balance too far in favour of the 
subsequent buyer. We recognize, however, that this, too, is a troublesome 
question that will require further consideration if it is decided to adopt a 
provision similar to section 5.18. 50 

Both of the models that we have discussed appear to have advantages 
and disadvantages. The strength of the first model is that it proceeds from 
a theory of implied warranties that run directly from the prior seller to the 
subsequent buyer undisturbed by all the complexities of the relationship 
between the prior seller and his buyer. Its weakness resides in the fact 
that it may not be possible, in many instances, for the prior seller to give 
effective notice to the subsequent buyer of disclaimer clauses or other 
special circumstances affecting the distribution of the goods. Fairly detailed 
rules would be necessary to clarify the position. The advantage of the 
second model adopted by New South Wales and by this Commission in 
its tentative draft provision is that it avoids these difficulties by proceeding 
from a theory of derivative rights. This provides maximum certainty and 
predictability from the prior seller's point of view, and, in particular, 
protects him against the danger of being mulcted in heavy damages by an 
indeterminate number of subsequent buyers. Its weakness lies in the fact 
that it puts the subsequent buyer completely at the mercy of a contractual 
relationship to which he is not a party. 

We do not suggest that the choice between these two models is clear 
and obvious. We are, however, persuaded, at least at this stage, that the 
approach adopted by the New South Wales Working Paper, and reflected 
in our draft provision, is preferable. Our own view is that if the main 
proposition — the right of a subsequent buyer to sue a prior seller for 
breach of warranty — is accepted as sound, then it should not be too 
difficult to find a compromise solution on the scope of the prior seller's 
defences. 



48 Quebec law, as expounded in General Motors Products of Canada Ltd. v. 
Leonis Kravitz, footnote 13 supra, appears to contemplate both possibilities. 

49Section20L(2)(b). 

50 The issue is not as simple as it looks. Obviously, settlements reached in bad 
faith should not be binding on a subsequent buyer; but what of good faith 
settlements? Suppose, after receiving the goods and before any resale, the 
first buyer complains about their quality and the claim is settled by the prior 
seller, allowing an abatement on the price. The buyer then resells the goods 
without disclosing the defect. Fairness suggests that the prior seller's position 
should be the same as if the first buyer knew of the defect in quality before 
he received the goods. 



255 



(h) OTHER CONSEQUENTIAL ISSUES 



The New South Wales Working Paper 51 touches on a number of 
other consequential issues of a procedural character. In our view, these 
and others can be safely deferred to a later date pending agreement on the 
question of principle. 



^Supra, footnote 34, paras. 7.15-7.16; Draft Bill, s. 20L(2). 



PART V 
TRANSFER OF PROPERTY (TITLE) IN GOODS 



Introduction 

This part of the Report will deal with two important facets of pro- 
perty rights and their incidents arising out of the contract of sale. The 
first involves the time and impact of the transfer of title on the rights of 
the parties inter se. The second focuses on the question whether the buyer 
can acquire a better title to the goods than the seller himself had. A plea 
of confession and avoidance is in order. Because of the pivotal role 
played by the concept of title in the existing law, it is customary, indeed 
inevitable, to link this concept with the important consequences that flow 
from a transfer of title. As will be seen, the Code departs radically from 
this approach and, generally speaking, the parties' rights are not dependent 
on the situs of title under the Code. For the purpose of the ensuing dis- 
cussion it seems convenient, however, to deal with the two approaches 
under the same rubric. The existing Ontario Act uses "property" when 
referring to the rights and duties of the parties inter se, 1 and "title" in 
the context of the sections 2 stating the exceptions to the rule that a seller 
cannot transfer a better title than he himself has. 3 The Code does not 
observe this distinction, but uses title throughout. In the discussion that 
follows, and unless otherwise indicated, "property" and "title" are used 
interchangeably to convey the same meaning. 



iSee, for example, The Sale of Goods Act, R.S.O. 1970, c. 421, ss. 2(1), 13(a), 

17-19, 21,47(1). 
Vbid., ss. 22-25; and see, also, s. 46(2). 
3 The significance of the distinction is a matter of controversy. See, Battersby 

and Preston, "The Concepts of 'Property', 'Title' and 'Owner' used in the Sale 

of Goods Act 1893" (1972), 35 Mod. L. Rev. 268. 

[257] 



CHAPTER 11 



TRANSFER OF TITLE AND ITS INCIDENTS 
BETWEEN SELLER AND BUYER 



1. Defects in Existing Law 

The focal role occupied by property concepts in traditional sales law 
is hardly surprising, 1 since the overriding purpose of a contract of sale is 
to transfer the general property in goods from the seller to the buyer. 2 Its 
importance, moreover, is greatly enhanced in existing Anglo-Canadian 
law in two respects. First, there are the rules in the Act dealing with the 
following matters: namely, the transfer of risk; 3 the right to payment of the 
price; 4 the right to reject specific goods; 5 and, the seller's rights of resale 
and the measurement of damages. 6 These rules are presumptively linked 
to, or affected by, the locus of title. Secondly, there is the much broader 
range of non-sales rules whose operative effect turns on the same question. 
Examples are as follows: namely, the existence of an insurable interest; 7 
the right to replevy 8 or to claim goods in bankruptcy; 9 the right to sue 
third parties in conversion and for injury to the goods; 10 exigibility of goods 
by execution; 11 exposure to various forms of taxation; 12 liability as "owner" 
under motor vehicle acts; 13 and, criminal liability under a variety of penal 
or regulatory statutes. 14 A sales act cannot be expected to regulate all the 
non-sales incidents of transfer of title, but it may well be asked, as it has 
been asked, 15 what features the questions of risk, price, rejection, and rights 
of resale have in common that cause them to be governed by the same 
metaphysical abstraction. 



iFor a general discussion of transfer of title and its incidents between seller and 
buyer, see, Crawford, "Property in Goods, Incidence and Consequences", Re- 
search Paper No. IV. 1. 
2The Sale of Goods Act, R.S.O. 1970, c. 421, s. 2(1). 
3S. 21. 
4S. 47. 
5S. 12(3). 
6Ss. 38(1) (c), 46. 

7 See, The Insurance Act, R.S.O. 1970, c. 224, s. 122, stat. cond. 2. 
*Smith v. Billard (1922), 55 N.S.R. 502 (C.A.); Haverson v. Smith (1906), 16 
Man. R. 204 (K.B.). 

9 See, for example, In re Wait, [1927] 1 Ch. 606 (C.A.); and, compare, Carlos 
Federspiel & Co. S.A. v. Charles Twigg & Co. Ltd., [1957] 1 Lloyd's Rep. 
240 (Q.B.). 
^Haverson v. Smith, footnote 8 supra; McGregor v. Whalen (1914), 31 O.L.R. 
543, 20 D.L.R. 489 (C.A.); Zaiser v. Jesske, [1918] 3 W.W.R. 757 (Sask. 
C.A.); Benjamin's Sale of Goods (1974), para. 293; Jarvis v. Williams, [1955] 
1 All E.R. 108 (C.A.). 
iiFor example, Johnson v. Logan (1889), 32 N.S.R. 28 (C.A.). 
i2See, Steel Co. of Canada Ltd. v. R., [1955] S.C.R. 161 (S.C.C.). 
i3For example, The Highway Traffic Act, R.S.O. 1970, c. 202, s. 147. 
MR. v. Thomas, [1928] 2 W.W.R. 608 (Alta. S.C., App. Div.); R. v. Chappus 

(1920), 48 O.L.R. 189, 55 D.L.R. 77 (H.C.J.). 
iSLlewellyn, "Through Title to Contract and a Bit Beyond" (1937-38), 15 
N.Y.U.L.Q. Rev. 159; and, compare, Crawford, footnote 1 supra, pp. 1-3. 

[259] 



260 

The picture is further complicated. The rules adopted by the Ontario 
Sale of Goods Act to determine the time of transfer of title are so com- 
plex, and frequently turn on such highly subjective factors, that accurate 
prediction of the outcome of a litigated issue is well nigh impossible, and 
incongruous results may well occur. The existing Sale of Goods Act pro- 
ceeds from two basic principles, and then elaborates a series of presump- 
tive rules to assist the court in discharging its task. The overriding prin- 
ciples are contained in sections 17 and 18 of the existing Act, and may 
be stated in this way. First, title cannot pass before the goods have been 
ascertained. 16 Secondly, where there is a contract for the sale of specific 
or ascertained goods, the parties' own intentions govern as to the time 
of transfer. 17 

If a different intention has not been manifested (and many contracts 
are silent on the question) then the presumptive rules in section 19 of the 
Act, relating to the intention of the parties as to the time at which the 
property in the goods is to pass, come into play. 18 These rules are no- 

16 77ie Sale of Goods Act, R.S.O. 1970, c. 421, s. 17. This section provides as 
follows : 

17. Where there is a contract for the sale of unascertained goods, no 
property in the goods is transferred to the buyer until the goods are ascer- 
tained. 
17 1 bid., s. 18. This section reads as follows: 

18(1) Where there is a contract for the sale of specific or ascertained 
goods, the property in them is transferred to the buyer at such time as the 
parties to the contract intend it to be transferred. 

(2) For the purpose of ascertaining the intention of the parties regard 
shall be had to the terms of the contract, the conduct of the parties and 
the circumstances of the case. 
18 Section 19 reads as follows: 

19. Unless a different intention appears, the following are rules for ascer- 
taining the intention of the parties as to the time at which the property in 
the gpods is to pass to the buyer: 

Rule 1. — Where there is an unconditional contract for the sale of speci- 
fic goods in a deliverable state, the property in the goods passes to 
the buyer when the contract is made and it is immaterial whether 
the time of payment or the time of delivery or both is postponed. 
Rule 2. — Where there is a contract for the sale of specific goods and 
ihe seller is bound to do something to the goods for the purpose of 
putting them into a deliverable state, the property does not pass until 
such thing is done and the buyer has notice thereof. 
Rule 3. — Where there is a contract for the sale of specific goods in a 
deliverable state but the seller is bound to weigh, measure, test or 
do some other act or thing with reference to the goods for the pur- 
pose of ascertaining the price, the property does not pass until such 
act or thing is done and the buyer has notice thereof. 
Rule 4. — When goods are delivered to the buyer on approval or 'on sale 
or return' or other similar terms, the property therein passes to the 
buyer: 
(i) when he signifies his approval or acceptance to the seller or does 

any other act adopting the transaction; 
(ii) if he does not signify his approval or acceptance to the seller 
but retains the goods without giving notice of rejection, then if a 
time has been fixed for the return of the goods, on the expiration 
of such time, and, if no time has been fixed, on the expiration 
of a reasonable time, and what is a reasonable time is a question 
of fact. 



261 

toriously difficult to apply and, not surprisingly, different courts have often 
reached different results on substantially similar facts. The difficulties are 
particularly acute in the case of a contract involving the sale of future 
or unascertained goods. In such a case, in one set of circumstances, the 
presumptive rule in section 19, Rule 5(i) of the Act requires the court to 
inquire not only whether goods of the correct "description" and in a 
"deliverable state" were "unconditionally" appropriated to the contract, 
but also whether the buyer gave his "assent" to the appropriation and 
whether the assent was "express" or "implied". 19 The resulting confusion 
was aptly described by Lord Cresswell in a judgment written more than 
a century ago. 20 This description remains very relevant today. Lord 
Cresswell stated: 

It is impossible to examine the decisions on this subject without 
being struck by the ingenuity with which sellers have contended that 
the property in goods contracted for had, or had not, become vested 
in the buyers, according as it suited their interest; and buyers, or their 
representatives, have, with equal ingenuity, endeavoured to show 
that they had, or had not, acquired the property in that for which 
they contracted; and Judges have not unnaturally appeared anxious 
to find reasons for giving a judgment which seemed to them most 
consistent with natural justice. Under such circumstances, it cannot 
occasion much surprise if some of the numerous reported decisions 
have been made to depend upon very nice and subtle distinctions, 
and if some of them should not appear altogether reconcilable with 
each other. 21 

If the courts manipulate the rules to achieve equitable results, would it 
not be simpler, it may well be asked, to achieve the same results by pro- 
viding issue oriented rules that are not geared to an elusive "title"? 

A further group of difficulties arises from the failure of the Act to 
distinguish between a reservation of title by the seller before the goods 
have been delivered to the buyer, and those situations in which the seller 



Rule 5.— 

(i) Where there is a contract for the sale of unascertained or future 
goods by description and goods of that description and in a deliv- 
erable state are unconditionally appropriated to the contract, 
either by the seller with the assent of the buyer, or by the buyer 
with the assent of the seller, the property in the goods thereupon 
passes to the buyer, and such assent may be expressed or implied 
and may be given either before or after the appropriation is 
made, 
(ii) Where in pursuance of the contract the seller delivers the goods 
to the buyer or to a carrier or other bailee (whether named by 
the buyer or not) for the purpose of transmission to the buyer 
and does not reserve the right of disposal, he shall be deemed to 
have unconditionally appropriated the goods to the contract. 
19 See, the analysis of these requirements in Benjamin's Sale of Goods (1974), 

paras. 349 et seq. 
™Gilmour v. Supple (1858), XI Moore 551, 556, 14 E.R. 803, 809 (P.C.). 
21 For a similar statement, see Jerome v. Clements Motor Sales Ltd., [1958] 
O.R. 738, (1958), 15 D.L.R. (2d) 689 (C.A.), per Laidlaw, J.A., at 15 
D.L.R. (2d) 690. 



262 

reserves title after delivery to secure payment of the price. Only recently, 
with the adoption of The Personal Property Security Act, 21 has this 
anomaly been removed. 23 It may well be, however, that part of this 
anomaly continues to survive in cases where a bill of lading is issued in 
the seller's favour after shipment of the goods, and before the bill is en- 
dorsed to the buyer. 24 

2. The Code Approach 25 

Karl Llewellyn, the chief reporter of the Code, was sharply critical 
of these defects in the U.K. and American sales Acts. In a celebrated 
article written by him before the War, 26 he contended, first, that the 
"lump" concept of title should be abandoned in favour of an issue oriented 
approach and, secondly, that the revised rules should be applied to easily 
and objectively ascertainable sets of facts. Article 2 clearly bears the 
imprint of these views. The preamble to section 2-401 declares in part: 

Each provision of this Article with regard to the rights, obliga- 
tions and remedies of the seller, the buyer, purchasers or other third 
parties applies irrespective of title to the goods except where the 
provision refers to such title. 

Llewellyn's first goal, the abandonment of title in favour of an issue 
oriented approach, is emphasized in this provision and is reflected in 
subsequent sections dealing with matters that include the following: special 
property and insurable interests; 27 right to claim or recover goods on 
insolvency; 28 transfer of risk; 29 right to reject and revocation of accept- 
ance; 30 and, seller's right to sue for the price. 31 The more important of 
these will be examined presently. It is important to note, however, that 
the concept of title has not disappeared from Article 2; it has been de- 

22R.S.O. 1970, c. 344 as am., especially s. 2(a) (i) and s. l(y). 

23 Under prior law, it was usually held, inter alia, that risk remained with the 
seller unless the agreement provided otherwise: see, for example, Killoran v. 
Monticello State Bank, [1920] 3 W.W.R. 17 (Alta. S.C., Tr. Div.) rev'd on 
other grounds [1920] 3 W.W.R. 542 (App. Div.), and aff'd (1921), 61 S.C.R. 
528 (S.C.C.). The Personal Property Security Act does not expressly overrule 
these cases, but their reversal is necessarily implicit in the concept that a con- 
ditional seller merely retains a security interest in the goods, once the goods 
have been delivered to the buyer. See, also, Weir, "Risk in Conditional Sale 
Agreements" (1929), 7 Can. Bar Rev. 744, reprinted in (1942-45), 5 Alta. 
L.Q. 19. 

24 See, infra, ch. 14, sec. A.3(c). 

25 The literature is substantial. See, among others, White & Summers, Handbook 
of the Law Under the Uniform Commercial Code (1972), pp. 134 et seq; 
Duesenberg and King, Sales and Bulk Transfers Under the Uniform Commer- 
cial Code, Bender's Uniform Commercial Code Service, Vol. 3 A, chapters 8 and 
10; Latty, "Sales and Title and the Proposed Code" (1951), 16 L. & Contem. 
Prob. 3; Duesenberg, "Title: Risk of Loss and Third Parties" (1965), 30 Mo. 
L. Rev. 191. 

26Supra, footnote 15. See, also, his evidence before the New York Law Revision 

Commission, quoted in White & Summers, supra, pp. 136-37. 

27UCC 2-501. 

28UCC 2-502, 2-702. 

29UCC 2-509, 2-510. 

30UCC 2-601, 2-608. 

51UCC 2-709. 



263 

moted, but not disinherited, and will continue to play a significant role 
in numerous situations not governed by express Code provisions. 32 The 
other goal for which Llewellyn strove, the adumbration of easily observ- 
able physical facts as the basis for the application of issue oriented rules, 
is exemplified in sections 2-501, 2-509, and 2-401. We agree, as do 
members of the Research Team, 33 that the Code approach on both these 
matters is sound, and should be adopted in the revised Ontario Act. 34 
We are fortified in our conclusion by the fact that the Code approach has 
also been applied in the Hague Uniform Law 35 and in the 1977 draft 
UNCITRAL Convention 36 in determining the rights of the parties inter se. 
As will be seen, however, we do not subscribe to all the Code provisions 
implementing the new policies, nor to the language in which they are 
expressed. 

Some of the relevant Code provisions will now be examined more 
fully, both to illustrate the important conceptual departures from existing 
Anglo-Canadian law, and to draw attention to a number of possible 
difficulties. 

(a) SPECIAL PROPERTY AND INSURABLE INTEREST 

Section 2-501 provides as follows: 

2-501.(1) The buyer obtains a special property and an insurable 
interest in goods by identification of existing goods as goods to which 
the contract refers even though the goods so identified are non- 
conforming and he has an option to return or reject them. Such 
identification can be made at any time and in any manner explicitly 
agreed to by the parties. In the absence of explicit agreement identifi- 
cation occurs 

(a) when the contract is made if it is for the sale of goods 
already existing and identified; 



32See, UCC 2-401. 

33 See, Crawford, footnote 1 supra, especially at p. 48. 

34See, for example, Draft Bill, s. 6.1(1). 

35 See, Uniform Law on The International Sale of Goods, Arts. 96-101, espe- 
cially Arts. 96 and 97, which read as follows: 
Article 96 

Where the risk has passed to the buyer, he shall pay the price notwith- 
standing the loss or deterioration of the goods, unless this is due to the 
act of the seller or of some other person for whose conduct the seller is 
responsible. 
Article 97 

1. The risk shall pass to the buyer when delivery of the goods is effected 
in accordance with the provisions of the contract and the present Law. 

2. In the case of the handing over of goods which are not in confor- 
mity with the contract, the risk shall pass to the buyer from the moment 
when the handing over has, apart from the lack of conformity, been 
effected in accordance with the provisions of the contract and of the pres- 
ent Law, where the buyer has neither declared the contract avoided nor 
required goods in replacement. 

36 See, UNCITRAL, Report on Tenth Session (1977), General Assembly, Official 
Records: Thirty-Second Session, Supp. No. 17, (A/32/17), Arts. 64-68, espe- 
cially Arts. 64 and 65. 



264 

(b) if the contract is for the sale of future goods other than 
those described in paragraph (c), when goods are shipped, 
marked or otherwise designated by the seller as goods to 
which the contract refers ; 

(c) when the crops are planted or otherwise become growing 
crops or the young are conceived if the contract is for the 
sale of unborn young to be born within twelve months 
after contracting or for the sale of crops to be harvested 
within twelve months or the next normal harvest season 
after contracting whichever is longer. 

(2) The seller retains an insurable interest in goods so long as title 
to or any security interest in the goods remains in him and where the 
identification is by the seller alone he may until default or insolvency 
or notification to the buyer that the identification is final substitute 
other goods for those identified. 

(3) Nothing in this section impairs any insurable interest recog- 
nized under any other statute or rule of law. 

This section has no counterpart in The Sale of Goods Act although, in a 
loose sense, it could be described as a miniature title provision. "Special 
property", under the Code, is a necessary ingredient in the following cases: 
namely, the buyer's right to claim goods on the seller's insolvency; 37 the 
exercise of the right to replevy; 38 or, the right to sue third parties for 
injury to the goods. 39 Several features are noteworthy. First, the statutory 
rules of identification apply unless the parties have explicitly adopted dif- 
ferent rules. This requirement sensibly eliminates the traditional search 
for the parties' implied intention, sanctioned in section 18 of the present 
Ontario Act. Secondly, identification can occur without the buyer's con- 
sent. This sharply distinguishes the Code concept from the concept of 
appropriation in section 19, Rule 5, of the Ontario Act; and for good 
reason, since identification enures for the buyer's benefit and does not, 
qua buyer, impose on him any burdens under section 2-50 1. 40 Thirdly, 
the seller's identification need not be irrevocable, again an important point 
of departure from the existing law. Fourthly, identification does not require 
either that the goods be in a deliverable condition, or the completion of 
other steps necessary to determine the price. In this respect, too, section 
2-501 is greatly superior to the rules in section 19 of The Sale of Goods 
Act. We are persuaded by the merits of these features and recommend 
adoption in the revised Act of a provision comparable to UCC 2-50 1. 41 

It will be observed that, in the case of a contract involving future 
crops or the unborn young of animals, special time limitations are pre- 
scribed by UCC 2-501 (l)(c). The presumptive rules only apply if the 
contract is for the young of animals to be born within twelve months of 



37UCC 2-502. 

38TJCC 2-716(3). 

39UCC 2-722. 

40It does not, for example, affect the time of transfer of risk, or the buyer's 

liability to pay the price: see, UCC 2-501, Comment 4. 
4iSee, Draft Bill, s. 7.1. 



265 

the contract, or, for crops that are to be harvested within twelve months 
of the contract or the next normal harvest season, whichever is longer. 
These restrictions were designed to protect farmers and have a long 
history. 42 Until the adoption of The Personal Property Security Act they 
had no counterpart in Ontario legislation. Our attention has not been 
drawn to abuses involving long term contracts of this nature. However, 
the one year limitation has been copied in section 13(2)(a) of The 
Personal Property Security Act and, for the sake of consistency, we re- 
commend retention of the same restrictions in the revised Sale of Goods 
Act. 

(b) buyer's right to goods on seller's insolvency 

Section 2-502 provides as follows : 

2-502.(1) Subject to subsection (2) and even though the goods 
have not been shipped a buyer who has paid a part or all of the price 
of goods in which he has a special property under the provisions 
of the immediately preceding section may on making and keeping 
good a tender of any unpaid portion of their price recover them from 
the seller if the seller becomes insolvent within ten days after receipt 
of the first installment on their price. 

(2) If the identification creating his special property has been 
made by the buyer he acquires the right to recover the goods only if 
they conform to the contract for sale. 

The implications of this section are examined more fully in chapter 17. 
Suffice it to say at this juncture that the buyer's rights are so narrowly 
circumscribed that they are of little practical importance. Moreover, it is 
doubtful whether Ontario could, constitutionally, adopt a similar provision. 

(c) RISK OF LOSS 

(i) General Observations 

Multiple hazards can accompany goods between the time of their 
identification to the contract and the time of their actual receipt by the 
buyer. This possibility has led to the adoption of rules governing the 
location of the risk of loss that go back at least to Roman times. 43 

Risk rules and rules of frustration intersect; but they are not the 
same. Unless otherwise provided, a frustrating event discharges both 
parties from further obligations under the contract. This result does not, 
however, necessarily follow from loss of, or damage to, the goods. If risk 



42 See, Gilmore, Security Interests in Personal Property (1965), Vol. II, sees. 
32.1-32.3, pp. 857-63. Also, see, Coates, Law and Practice in Chattel Secured 
Farm Credit (1954); and Note, "Mortgages on Future Crops as Security for 
Government Loans" (1937), 47 Yale L.J. 98. One concern was the ability of the 
farmer to obtain financing for current crops if a prior crop mortgagee might 
have an interest beyond the crop for which he specifically gave financing. 

43 Buckland, A Textbook of Roman Law (3rd rev. ed., 1963), pp. 486-87 et seq.; 
Lawson, "The Passing of Property and Risk in Sale of Goods — A Compara- 
tive Study" (1949), 65 L.Q.R. 352, 354. 



266 

of loss at the material time lies with the buyer, he remains liable for the 
price; obviously, the contract is not discharged so far as he is concerned. 
Conversely, if the risk is with the seller, the buyer will be excused from 
further obligations, but whether the seller will also be relieved will turn on 
other factors. In this Report, therefore, it will be convenient to postpone 
discussion of frustration problems to a later chapter. 44 

Four basic tests have been adopted by different legal systems to 
determine the time when risk of loss passes from the seller to the buyer. 45 
According to these tests, risk passes as follows: (a) when the contract 
is concluded; (b) when title in the goods is transferred; (c) when the 
seller has delivered the goods, actually or constructively; and, (d) when 
the buyer has actually received the goods. Roman law was the source of 
the first test. It is a test that survives in a substantial number of civil law 
jurisdictions, including Switzerland, the Netherlands, Japan and members 
of the Latin American legal system. The title or property test 46 has been 
adopted in France, among other jurisdictions. This test was also part of the 
common law, 47 and was codified in the U.K. Sale of Goods Act, 1893. It 
is reproduced in section 21 of the Ontario Act. 48 The "delivery" test is in 
force in the Scandinavian countries and, as will be seen, has been sub- 
stantially adopted in the Uniform Commercial Code. The fourth test, the 
one that turns on transfer of possession, obtains under German and Aus- 
trian law, and under the laws of various Eastern European countries. An 
important aspect of it also appears in the Code. 

If one groups together, as others have done, 49 the first two and the 
last two tests, it will be seen that there are only two basic tests: namely, 
those that turn upon identification and appropriation of the goods to the 
contract, and those that apply a delivery or control test. 

The title test adopted by the common law is difficult to justify func- 
tionally. It may seem reasonable to argue that the party in whom owner- 
ship is vested at the material time should also assume the risks incident 



^Infra, ch. 15. 

^International Encyclopedia of Comparative Law (January, 1969), Vol. 6, 

ch. 3, Model Section on "The Time of the Passing of Risk", paras. 511 et seq. 

Lagergren, Delivery of the Goods and Transfer of Property and Risk in the 

Law of Sale: A Comparative Study (Stockholm, 1954). 

*6Res perit domino (a phrase used to express the rule that, when something is 

lost or destroyed, the owner bears the loss or destruction). 
^Martineau v. Kitching (1872), L.R. 7 Q.B. 436, 454 per Blackburn, J. 
48 Section 21 reads as follows: 

Unless otherwise agreed, the goods remain at the seller's risk until the 
property therein is transferred to the buyer, but, when the property therein 
is transferred to the buyer, the goods are at the buyer's risk whether delivery 
has been made or not, but, 

(a) when delivery has been delayed through the fault of either the buyer 
or seller, the goods are at the risk of the party in fault as regards 
any loss that might not have occurred but for such fault; and 

(b) nothing in this section affects the duties or liabilities of either seller 
or buyer as a bailee of the goods of the other party. 

^International Encyclopedia of Comparative Law, footnote 45 supra, para. 532, 
pp. 14-15. 



267 

to ownership. However, as has also been observed of the Roman test, 50 
it shows little concern for practical considerations. The title test ignores 
insurance factors; it disregards the fact that the party in possession of 
the goods is best able to ensure their safekeeping and to determine the 
cause of an accident; and, it overlooks the fact that, until the seller has 
delivered the goods, he has not completed his contractual obligations. A 
strict application of the title test leads to anomalous results that run 
counter to the expectations of practical persons. 51 It would greatly surprise 
a consumer buyer, and no doubt his seller, to be told that, by selecting 
a particular item on the seller's floor for subsequent delivery to his home, 
he could be deemed to have assumed the risk forthwith. 52 Conversely, 
a seller would find it difficult to understand why, following delivery, the 
risk of loss should remain with him simply because he retained title until 
payment of the price. These difficulties have not gone unobserved. In 
overseas shipment contracts, the business community long ago rejected the 
title test by the adoption of trade terms, such as "f.o.b." and "c.i.f.". These 
terms transfer the risk of loss to the buyer when the goods are delivered 
to the carrier, regardless of the locus of title. 53 The courts, too, carved 
out an important exception in the case of the sale of a part of a larger 
bulk of goods in storage that is accompanied by the transfer of a delivery 



50 "On the whole, the theory of transfer of risk upon the conclusion of the con- 
tract is a venerable dogma which has been developed and handed down to 
the present days with little concern for practical considerations; it belongs to 
the legal inventory inherited from former generations which in many places 
is preserved in name but used only with caution in cases of practical impor- 
tance": ibid., para. 532, p. 15. 

SlCompare, Atiyah, The Sale -of Goods (5th ed., 1975), pp. 168-69. 

52 "Certainly in practice retailers ignore the rules about risk for reasons of con- 
sumer good-will": Cranston, Consumers and the Law (1978), p. 171. 

53For f.o.b. contracts, see Benjamin's Sale of Goods (1974), para. 1704, citing 
inter alia, Stock v. Inglis (1884), 12 Q.B.D. 564, at pp. 573, 575, 577; on 
appeal (1885), 10 App. Cas. 263 (H.L.), 273; and, The Parchim, [1918] A.C. 
157, 168 (P.C.). The risk may remain on the seller after shipment where he 
has failed to perform his obligations under section 31 of The Sale of Goods 
Act: Benjamin's Sale of Goods (1974), para. 1707; or it may pass to the buyer 
before shipment where delivery is delayed through his fault: ibid., para. 1708. 
For c.i.f. contracts, see Benjamin's Sale of Goods (1974), para. 1562, citing 
the leading case of The Julia, [1949] A.C. 293 (H.L.), 309, that risk passes 
generally "on shipment or as from shipment". See, also, E. Clemens Horst Co. 
Ltd. v. Biddell Bros., [1911] 1 K.B. 934, at pp. 956, 959; Law & Bonar Ltd. 
v. British American Tobacco Co., [1916] 2 K.B. 605. Where goods to be 
shipped are paid for before shipment, it may be that risk passes before ship- 
ment as well: Wiehe v. Dennis Bros. (1913), 29 T.L.R. 250 (K.B.), per 
Scrutton, J. The American principles are much the same. While UCC sections 
2-319 and 2-320 provide ancillary clarifications of the locus of risk, the general 
rules contained in section 2-509 still apply. Risk will generally pass on ship- 
ment unless the contract is f.o.b. destination. These usual terms yield to a con- 
trary indication in the contract of sale itself: National Heater Co. v. Corrigan 
Co. Mechanical Contractors (1973), 482 F. 2d 87 (8th Cir.). Likewise, as in 
English law, risk may pass before shipment where the buyer's fault causes 
the delay in shipment: Multiplastics Inc. v. Arch Industries (1974), 14 U.C.C. 
Rep. 573 (Conn. Sup. Ct.). 



268 

warrant. 54 Technically, there is no transfer of title in such a case, since no 
particular part of the bulk has been appropriated to the contract; never- 
theless, in the interests of mercantile convenience, the courts found an 
implied intention that risk was to pass upon delivery of the warrant. 

These exceptions demonstrate the fundamental weakness of the title 
test and the superiority of the delivery test. As has been observed, 55 the 
"passing of risk upon actual delivery is the modern solution. It conforms 
with commercial views and practices; it has been adopted by the more 
recent national and international codifications". The Uniform Commercial 
Code, too, has adopted the "modern" solution. 

This solution is contained in section 2-509, which reads as follows: 

2-509.(1) Where the contract requires or authorizes the seller to 
ship the goods by carrier 

(a) if it does not require him to deliver them at a particular 
destination, the risk of loss passes to the buyer when the 
goods are duly delivered to the carrier even though the 
shipment is under reservation (Section 2-505); but 

(b) if it does require him to deliver them at a particular destina- 
tion and the goods are there duly tendered while in the 
possession of the carrier, the risk of loss passes to the 
buyer when the goods are there duly so tendered as to 
enable the buyer to take delivery. 

(2) Where the goods are held by a bailee to be delivered with- 
out being moved, the risk of loss passes to the buyer 

(a) on his receipt of a negotiable document of title covering 
the goods; or 

(b) on acknowledgment by the bailee of the buyer's right to 
possession of the goods; or 

(c) after his receipt of a non-negotiable document of title or 
other written direction to deliver, as provided in subsection 
(4)(b) of Section 2-503. 

(3) In any case not within subsection (1) or (2), the risk of 
loss passes to the buyer on his receipt of the goods if the seller is a 
merchant; otherwise the risk passes to the buyer on tender of delivery. 

(4) The provisions of this section are subject to contrary agree- 
ment of the parties and to the provisions of this Article on sale on 
approval (Section 2-327) and on effect of breach on risk of loss 
(Section 2-510). 



^Benjamin's Sale of Goods (1974), para. 404; Sterns Ltd. v. Vickers Ltd., 
[1923] 1 K.B. 78, dist'd in Comptoir a" Achat v. Luis de Ridder Limitada, 
[1949] A.C. 293 (H.L.). Compare, Inglis v. James Richardson & Sons Ltd. 
(1913), 29 O.L.R. 229, 14 D.L.R. 137 (C.A.). 

^International Encyclopedia of Comparative Law, footnote 45 supra, para. 532, 
p. 15. 



269 

The first three subsections of section 2-509 distinguish between three 
types of situation. The first involves contracts that require or authorize 
the seller to ship the goods by independent carrier ("shipment contracts"). 
Here, the risk passes to the buyer when the goods are delivered to the 
carrier, unless the seller is required to deliver them at a particular destina- 
tion ("destination contracts"). In the latter event, risk passes when the 
goods are there duly tendered while in the hands of the carrier. The 
second type of situation concerns goods in the hands of a bailee that are to 
be delivered without being moved. Here, risk of loss passes upon the 
buyer's receipt of a document of title or acknowledgement by the bailee 
of the buyer's right to possession. Finally, in cases not falling within the 
preceding rules, risk of loss passes to the buyer upon his receipt of the 
goods, if the seller is a merchant, and, if he is not, upon tender of delivery. 
It should be noted that, by virtue of section 2-509(4), the provisions of 
subsections (1), (2) and (3) are subject, inter alia, to contrary agree- 
ment of the parties. 

It will be observed that a common thread runs throughout these 
rules: that is, the transfer of possession of the goods from the seller to the 
buyer, or a tender thereof. The situs of title plays no role whatever. It has 
been said 56 that section 2-509 has been very successful in its objectives 
and that, unlike pre-Code law, it has generated very little litigation. We 
support the general philosophy of section 2-509 and recommend the 
adoption of a comparable provision in the revised Act. 57 There, are how- 
ever, a number of clarifications and changes that should be made in the 
Ontario version of the section to which we must now turn our attention. 

(ii) Issues Arising out of Section 2-509 and Related Questions 5 * 

(1) Shipment Contracts 

We recommend strengthening the language of subsection (l)(a) 
to make it clear that a "shipment" contract is the normal type of con- 
tract, and "destination" contract the variant type. 59 This clarification 
would bring subsection (l)(a) into conformity with the draftsman's in- 
tentions. 60 In our view, the word "duly" should also be deleted in "duly 
delivered" and "duly tendered" in subsections (l)(a) and (b), since 
its retention would lead to anomalous results. We interpret "duly" to mean 
in "accordance with the terms of the contract". That being so, any devia- 
tion, however inconsequential, would prevent the risk of loss passing to 
the buyer. This result would conflict with the principle we have previously 
recommended, that the revised Act should distinguish between substantial 
and non-substantial breaches for the purpose of determining the parties' 



56 White & Summers, footnote 25 supra, p. 137. 

57See, Draft Bill, s. 7.8. 

58 For American discussions of the Code's risk rules, see inter alia White & 
Summers, footnote 25 supra, pp. 134-66; Duesenberg and King, footnote 25 
supra, ch. 8; Foorman, "Risk of Loss Under Section 2-509 of the California 
Uniform Commercial Code" (1973), 20 U.C.L.A. L. Rev. 1352; and, Williams, 
"Risk of Loss Under the Uniform Commercial Code" (1974), 7 Ind. L. Rev. 
711. 

59See, Draft Bill, s. 7.8(1)1. 

60See, UCC 2-503, Comment 5. 



270 

remedies. We see no justification for applying a stricter test where the 
goods suffer casualty. It may also be noted that a literal rendering of 
"duly" in section 2-509 is inconsistent with the provisions of sections 
2-504 and 2-5 10. 61 

"Carrier" is not defined in Article 2. It is clear, however, 62 that the 
term does not include the seller's own transportation facilities; whether 
it includes the Post Office appears to be undecided, 63 although in principle 
there is no reason why it should not. 64 We do not deem it necessary to 
define this term. 

We have also been troubled about the practical implications of apply- 
ing section 2-509(1) (a) to sales where the buyer is a non-merchant. As- 
sume A, a non-merchant in Vancouver, orders a newly published book 
from a firm of publishers in Toronto. Assume, also, that the book is lost 
in transit. Who should bear the risk of loss? If the agreement contains no 
provision to the contrary, the contract may be deemed a "shipment" con- 
tract and the risk will lie with the non-merchant buyer, assuming the seller 
has made a proper contract of carriage with the seller. It is doubtful that 
the buyer would appreciate this result, and even more doubtful that he 
would carry insurance against such risks. 65 The problem does not appear 
to be discussed in the standard Anglo-Canadian or American textbooks. 
Our inquiries have shown that some large retail stores and other merchants 
with a mail order practice will not hold buyers responsible for risk of loss 
in transit. This policy, however, is based on the commendable grounds of 
fairness and good public relations, and not on the obligations implied by 
sales law. In any event, we have no reason to believe that this practice is 
universally followed by retail sellers. 66 We deem it desirable, therefore, to 
deal directly with the matter. We recommend that a provision be added 
to the revised Act 67 to make it clear that, where the seller is a merchant 
and the buyer is not, risk passes when the goods are tendered to the buyer 
at their destination. In other words, in such a case, the presumptive rule 
applicable to shipment contracts will not apply. It will, of course, be open 
to the parties to adopt a different rule; but we think it better that the burden 
of shifting the risk of loss should be upon the merchant than upon the 
buyer. 



61 Compare, Duesenberg and King, footnote 25 supra, p. 8-53. The authors appear 
to equate "duly" with the buyer's rights of rejection and transfer of risk in 
UCC 2-510(1). 

62 White & Summers, footnote 25 supra, pp. 143-44. 

Wbid. 

^Compare, Badische Anilin and Soda Fabrik v. Basle Chemical Works, [1898] 
A.C. 200 (H.L.). 

65 Under existing law, except in the case of c.i.f. contracts, there would appear to be 
no general obligation on the shipper to obtain insurance for the buyer's 
benefit: see, Benjamin's Sale of Goods (1974), para. 595. Nor is such an obli- 
gation explicitly imposed on the seller under UCC 2-504. Even if the shipper 
were obliged to insure for the buyer's benefit, the consumer would still be put 
to the trouble of making a claim under the policy. In our view, the merchant 
seller is usually much better equipped to handle such claims. 

66 Indeed, we have been given some examples to the contrary. 

67See, Draft Bill, s. 7.8(1), rule 1(c). 



271 

A very different problem raised by shipment contracts, and not cov- 
ered by UCC 2-509, involves sales made while goods are already afloat or 
in transit. If the goods are damaged or lost in transit, it may be difficult to 
ascertain the date of the casualty for the purpose of allocating the risk of 
loss. Article 66 of the 1977 draft UNCITRAL Convention 68 resolves this 
difficulty by providing that, in such cases, the risk is assumed by the buyer 
from the time the goods were handed over to the carrier who issued the 
documents controlling their disposition, unless at the time of the conclu- 
sion of the contract the seller knew or ought to have known that the goods 
had suffered casualty and failed to disclose this fact to the buyer. 

We are not aware of any Anglo-Canadian case law in which the prob- 
lem has been discussed. 69 It seems clear that the Code draftsman rejected 
the UNCITRAL approach. 70 Our own view is that, since the issue is one 
of first impression in Canada and does not appear to have given rise to 
practical difficulties, it would be premature to offer a legislative solution to 
it at this time. 

(2) Meaning of "Bailee'' 

Prior to the decision in Caudle v. Sherrard Motor Co., 11 there was 
some modest doubt as to whether a seller could ever be treated as a bailee 
for the purposes of subsection (2) of UCC 2-509. In the Caudle case, the 
Texas Civil Court of Appeals held that the subsection was only intended to 
apply to a "common law commercial bailee", such as a warehouseman. The 
requirement of a "commercial" bailee appears, at least in part, to add an 
unjustifiable gloss; but the requirement of an independent bailee is con- 
sistent with the underlying rationale of subsection (2). We therefore 
recommend that the provision comparable to UCC 2-509(2) adopted in 
the revised Act should make it clear that the provision only applies to 
goods held by a bailee "other than the seller". 72 

(3) UCC 2-509(3) 

This subsection raises two major issues. The first arises from the 
distinction that it draws between a merchant seller and a non-merchant 
seller. The second involves the question whether a merchant seller should 
remain at risk for an indefinite period; that is, until actual "receipt" of the 
goods by the buyer. 

So far as the first issue is concerned, the rationale of the distinction 



68 A comparable rule appears in ULIS, Art. 99(1). 

69 The question does not appear to be discussed in the standard Anglo-Canadian 
texts. The assumed facts occurred in Couturier v. Hastie (1856), 5 H.L.C. 673 
(H.L.), but the case was decided on different grounds. See, further, Berman 
and Kaufman, "The Law of International Commercial Transaction {Lex 
Mercatoria)" (1978), 19 Harv. Int. L. Rev. 221, at pp. 241-43. (We are 
indebted to Mr. Eric Bergsten, Senior Legal Officer of the International Trade 
Law Branch of the United Nations, for drawing our attention to the latter 
discussion.) 

70TJCC 2-509, Comment 2. 

71(1975), 525 S.W. 2d 238 (Tex. Civ. App.). 

72See, Draft Bill, s. 7.8(1), rule 2. 



272 

appears to be 73 that a merchant seller may be expected to insure the goods, 
whereas no such assumption can be made in the case of a non-merchant 
seller. This reasoning overlooks the fact that the seller still has control 
over the goods, and that it is more likely that he will be insured than a 
non-merchant buyer. It may be that the problem does not admit of a simple 
answer, and that a new rule should be devised that would take into con- 
sideration the parties' insurance coverage. Until such time, we are of the 
view that no distinction should be drawn in this context between merchant 
and non-merchant sellers. Accordingly, we recommend that the provision 
comparable to UCC 2-509(3) adopted in the revised Act should provide 
that, whether or not the seller is a merchant, risk of loss shall pass to the 
buyer upon receipt of the goods. 74 It should be emphasized that this does 
not mean that the non-merchant seller will remain at risk indefinitely. Like 
the merchant seller he will have the benefit of UCC 2-510(3) ; 75 hence, 
once the buyer is in default, the risk of loss will lie with the buyer for a 
reasonable period, to the extent of any deficiency in the seller's insurance. 

The second issue raises a difficult and, as yet, unanswered point of 
construction of subsection (3). 76 Suppose A buys a horse from farmer B, 
pays him for it, and asks him to look after the horse until the following 
spring. 77 Does the risk of loss remain with the farmer in the meantime 
because the buyer is not in actual "receipt" of the goods under UCC 
2-509(3)? Would it make a difference if the farmer received separate 
compensation for his services? It is tempting to argue that, because the 
farmer has clearly become a bailee of the horse, 78 UCC 2-509(3) should 
cease to apply. This would ignore the requirement under subsection (3) 
of actual receipt of the goods by the buyer before the risk is deemed to 
pass. However, there is no reason why the buyer could not be considered 
to have waived actual receipt of the goods, or why, independently of such 
a waiver, the court could not infer from the facts an intention by the parties 
not to be governed by UCC 2-509(3). Since so much will turn on the 
facts of individual cases, we think the problem is best left for judicial 
resolution. We recommend, therefore, that the revised Act should not con- 
tain a specific provision to deal with this problem. 

(4) Duties as Bailee of Goods 

Section 21(b) of The Sale of Goods Act states that the provisions 
on the transfer of risk shall not affect the duties or liabilities of seller or 
buyer as a bailee of the goods of the other. The Code does not contain a 
similar provision, although the opinion has been expressed 79 that bailment 
principles will continue to apply where the goods are in the possession of 



73UCC 2-509, Comment 3. 

74See, Draft Bill, s. 7.8(1), rule 3. 

75 See, infra, sec. 2(d) (iii). 

76 See, White & Summers, footnote 25 supra, pp. 145-46. 

77 The example is based on Courtin v. Sharp (1960), 280 F. 2d 345, a pre-Code 

case, discussed in White & Summers, footnote 25 supra, at pp. 144-45, and 

146. 
78 UCC 2-509(2) would not apply in such a case, as that provision envisages 

goods in the hands of the bailee that are to be delivered without being moved. 
7 9See, White & Summers, footnote 25 supra, p. 149. 



273 

one party and title and risk of loss are in the other. We recommend that 
the revised Act should contain a provision comparable to Section 21(b) 
of the existing Act. 80 

(5) Deterioration of Goods in Transit 

Section 32 of the Ontario Sale of Goods Act deals with the question 
of deterioration of goods in the course of transit. The section provides as 
follows: 

32. Where the seller of goods agrees to deliver them at his own 
risk at a place other than that where they are when sold, the buyer 
nevertheless, unless otherwise agreed, takes any risk of deterioration 
in the goods necessarily incident to the course of transit.- 

As Benjamin notes, 81 the interpretation of this section gives rise to many 
difficulties, although the problem to which it addresses itself is of relatively 
small importance in overseas sales. The Code has no corresponding pro- 
vision. A principal difficulty about the section is that, in the case of perish- 
able goods, and possibly other goods as well, it appears to conflict with 
the seller's obligation under the implied condition of fitness to deliver goods 
that will remain fit for the duration of the journey and for a reasonable 
period thereafter. 82 The state of the art may be such that, no matter how 
careful the seller, deterioration in transit cannot be avoided. Perhaps this 
is all that section 32 means to convey. In any event, we think the question 
is one of proper interpretation of the seller's warranty obligations, and 
that it is best treated under this heading. In our view, section 32 could 
safely be omitted from the revised Ontario Act, and we so recommend. 

(d) RISK OF LOSS EFFECT OF PARTY'S BREACH (UCC 2-510) 

The question to be considered under this heading is the extent to 
which a party's breach should affect the normal rules for the transfer of 
risk. The existing Act, in section 21(a), 83 only deals with the effect of 
delay by the buyer or seller in receiving or making delivery of the goods. 
The effect of other types of breach must be gleaned from general principles 
of sales law. 84 UCC 2-510 addresses itself more systematically to the 
question and provides the following series of rules: 

2-510.(1) Where a tender or delivery of goods so fails to conform 
to the contract as to give a right of rejection the risk of their loss 
remains on the seller until cure or acceptance. 



80See, Draft Bill, s. 7.8(2). 

^Benjamin's Sale of Goods (1974), paras. 1435 et seq. Compare, Sassoon, 
"Damage Resulting from Natural Decay Under Insurance, Carriage, and Sale 
of Goods Contracts" (1965), 28 Mod. L. Rev. 180, especially at pp. 189-92. 

MMash & Murrell, Ltd. v. Jos. I. Emanuel, Ltd., [1961] 1 All E.R. 485 (Q.B.), 
rev'd on other grounds [1962] 1 All E.R. 77 (C.A.). Compare, Oleificio 
Zucchi S. p. A. v. Northern Sales, [1965] 2 Lloyd's Rep. 496 (Q.B.), at pp. 
517, 518. 

83 Supra, footnote 48. 

^Benjamin's Sale of Goods (1974), paras. 415-16; Sealey, " 'Risk' in the Law of 
Sale", [1972B] 31 Camb. L. J. 225, at pp. 242 et seq. 



274 

(2) Where the buyer rightfully revokes acceptance he may to the 
extent of any deficiency in his effective insurance coverage treat the 
risk of loss as having rested on the seller from the beginning. 

(3) Where the buyer as to conforming goods already identified to 
the contract for sale repudiates or is otherwise in breach before risk 
of their loss has passed to him, the seller may to the extent of any 
deficiency in his effective insurance coverage treat the risk of loss as 
resting on the buyer for a commercially reasonable time. 

It has been said 85 that at least part of the section conflicts with the policy 
of UCC 2-509 that the risk should lie with the person in possession, and 
that the draftsmen have provided no reason for departing from this rule. 
Whether this criticism is justified is debatable; but the section at least has 
the merit of being substantially consistent with existing Anglo-Canadian 
law. It will be convenient to consider separately the rules embraced in the 
three subsections. 

(i) Delivery of Non-Conforming Goods 

It seems reasonably clear under present law that, where the buyer 
has rightfully rejected the goods, risk of loss remains in or reverts to the 
seller. This is so, either on the basis that title never passed, or that it 
revested in the seller on rejection. 86 Presumably, the same reasoning would 
be applied where risk has passed to the buyer and the goods have suffered 
casualty before the buyer has had an opportunity to reject them. 87 If this 
assumption is made, there is nothing novel about subsection (1), which 
clearly embraces both types of case. 

(ii) UCC 2-510(2) 

Unlike the Code, 88 The Sale of Goods Act does not recognize the 
buyer's right to revoke his acceptance. If, however, one accepts the sound- 
ness of the concept, as we do, 89 it is reasonable that the goods should 
revert to the seller's risk after revocation. It will be noted that, under UCC 
2-510(2), the revocation is retroactive in character, although it is not 
clear 90 what the Code means by the words "from the beginning" in the 
subsection. Presumably, they mean that the risk may be treated as having 
rested with the seller from the time of acceptance. Retroactivity may seem 
harsh, but it is no more onerous than holding the seller at risk for non- 
conforming goods that were never accepted by the buyer, although sub- 
ject to his control. It will be noted, moreover, that the risk only reverts 



85 White & Summers, footnote 25 supra, p. 147. 

86Compare, Kwei Tek Chao v. British Traders & Shippers Ltd., [1954] 2 Q.B. 

459; Hardy & Co. v. Hillerns & Fowler, [1923] 2 K.B. 490 (C.A.), per 

Atkin, L.J., at p. 499; Benjamin's Sale of Goods (1974), para. 867. 
87 Dr. Sealey, footnote 84 supra, at p. 244, regards the point as unsettled, but also 

argues that, "To hold otherwise would unnecessarily penalize the buyer when 

the seller is in breach." 
88TJCC 2-608. 
mnfra, ch. 17, sec. C. 2(c). 
90\Vhite & Summers, footnote 25 supra, p. 149. Compare, Duesenberg and King, 

footnote 25 supra, pp. 8-54/55. 



275 

to the seller to the extent of any deficiency in the buyer's insurance cover- 
age. 

(hi) UCC 2-510(3) 

Unlike subsections (1) and (2), this subsection is concerned with 
the effect on risk of breaches by the buyer. The comparison here between 
Code law and existing Anglo-Canadian law is more complex. Pursuant to 
section 21 (a) 91 of the Ontario Sale of Goods Act, the buyer is responsible 
for any loss incurred if delivery is delayed because of his fault, but only 
in respect of any loss that might not have occurred but for such fault. The 
Act does not deal with the effect on the location of risk of other breaches 
by the buyer. UCC 2-510(3) differs from section 21(a) in the following 
respects: (a) there is no requirement of proof of causality; (b) the trans- 
fer of risk to the buyer is only for a "commercially reasonable time"; (c) 
conformably to the principle in subsection (2), the risk is only transferred 
to the extent of any deficiency in the seller's insurance coverage; and, (d) 
the Code provision applies to any breach by the buyer after conforming 
goods have been identified to the contract. We support the enlarged scope 
of UCC 2-510(3) and its philosophy that the buyer's breach should only 
affect the location of risk insofar as the seller has actually been prejudiced 
by the breach. 

The phrase "commercially reasonable time" was interpreted in Mul- 
tiplastics Inc. v. Arch Industries Inc. 92 to mean sufficient time to enable 
the seller to procure insurance coverage. We recommend that this be made 
clear in the revised Ontario Act. An alternative explanation 93 put forward 
for the phrase is that it covers the time necessary to enable the seller to 
dispose of the goods in his possession in order to avoid excessive storage 
costs and prolonged risk of casualty, deterioration or depreciation. We 
have considered whether to give effect to this construction by adding at the 
end of subsection (3) the words, "or to make other arrangements for their 
[that is, the goods'] disposition". We have concluded, however, that the 
addition is unnecessary. 

(iv) Conclusion 

We support the principles contained in UCC 2-510. We therefore 
recommend that a provision similar to UCC 2-510 be adopted in the 
revised Act. 94 It should, however, be made clear that the phrase "com- 
mercially reasonable time" in subsection (3) refers to the period neces- 
sary to enable the seller to procure insurance coverage. 

(e) ACTION FOR THE PRICE 

Another case in which the concept of property plays an important 
role in Anglo-Canadian law is found in section 47 of The Sale of Goods 

9l Supra, footnote 48. 

92(1974), 348 A. 2d 618 (Conn. Sup. Ct.), discussed in Duesenberg and King, 

footnote 25 supra, p. 8-61, n. 44. 
93 Honnold, Cases and Materials on the Law of Sales and Sales Financing (4th ed., 

1976), p. 186. 
94See, Draft Bill, s. 7.9. 



276 

Act. By virtue of this section, the seller can only claim the price where 
the property has passed to the buyer, unless the price is payable on a day 
certain. The Code rule, contained in UCC 2-709, proceeds from an en- 
tirely different premise. This rule only allows the seller to sue for the price 
where the buyer has accepted the goods or where, in the case of identified 
goods, the seller is unable to resell the goods at a reasonable price. In other 
cases, he is remitted to a claim in damages. The theory of the Code, as 
propounded by Llewellyn, 95 is that it is economically wasteful to impose 
unwanted goods on a buyer, especially where the seller can find a ready 
market for the goods. The difficult policy questions raised by section 
2-709 are examined in a later chapter in this Report. 96 It will be conveni- 
ent to postpone further discussion of this section until then. 

(f) SALES ON APPROVAL AND CONTRACTS OF SALE OR RETURN 

Some of the problems associated with these types of contract have 
been discussed in an earlier chapter 97 and others are discussed below. 98 
The Sale of Goods Act has very little to say about these contracts. The 
only express provision appears in section 19, Rule 4, which provides pre- 
sumptive indicia with respect to the time when the property passes under 
such contracts. By way of contrast, the Code provides "a reasoned analysis 
of the parties' legitimate interests". 99 The relevant provisions appear in 
sections 2-326 and 2-327. So far as the risk of loss is concerned, the Code 
distinguishes, in section 2-327(1) (a) and (2)(b), between a sale on ap- 
proval and a contract of sale or return. In the former case, the risk remains 
with the seller until the buyer has accepted the goods; in the latter, it 
remains with the buyer until he returns the goods. The distinction is a 
sensible one and commends itself for adoption in Ontario. Accordingly, 
the Commission recommends that provisions similar to UCC 2-327(1) (a) 
and (2)(b) dealing with risk of loss in sales on approval and contracts of 
sale or return should be included in the revised Ontario Act. 100 

(g) ENTITLEMENT TO SUE FOR TORT DAMAGES 

Under existing common law rules, a person is only entitled to sue a 
third party for conversion or other wrongful interference with, or injury to, 
goods in the following circumstances: if he was in possession of the goods 



95 According to Llewellyn: 

Decently admeasured damages are all a seller needs, and are just what a 
seller needs, when the mercantile buyer repudiates. It is, indeed, social 
wisdom for the rest of us to leave the selling house, in most cases which 
have not involved shipment to a distant point, to dispose of whatever goods 
may have come into existence or into his warehouse; that is its business, and 
the buyer's prospective inability has been already evidenced. To force such 
goods on the buyer, where they are reasonably marketable by the seller, is 
social waste. 
See, Llewellyn, footnote 15 supra, at pp. 176-77, also cited in Crawford foot- 
note 1 supra, at p. 41. 

9(>Infra, ch. 16, sec. 3(a). 

91 Supra, ch. 4. 

mnfra, ch. 12. 

"See, Crawford, footnote 1 supra, p. 43. 

lOOSee, Draft Bill, s. 5.26. 



277 

at the time of commission of the tort; if he had an immediate right to pos- 
session coupled with a proprietary interest; 101 or, where he is claiming 
permanent injury to his reversionary interest. 102 These restrictions may 
create hardship to a seller or buyer out of possession, especially where the 
party in possession is unable or unwilling to take proceedings himself, or 
where there is a danger that he may not adequately protect the interests of 
the party out of possession. Following earlier American statutory prece- 
dents, 103 section 2-722 of the Code relaxes the common law requirements 
substantially. The section reads as follows: 

2-722. Where a third party so deals with goods which have been 
identified to a contract for sale as to cause actionable injury to a 
party to that contract 

(a) a right of action against the third party is in either party to 
the contract for sale who has title to or a security interest 
or a special property or an insurable interest in the goods; 
and if the goods have been destroyed or converted a right 
of action is also in the party who either bore the risk of loss 
under the contract for sale or has since the injury assumed 
that risk as against the other; 

(b) if at the time of the injury the party plaintiff did not bear 
the risk of loss as against the other party to the contract for 
sale and there is no arrangement between them for disposi- 
tion of the recovery, his suit or settlement is, subject to his 
own interest, as a fiduciary for the other party to the con- 
tract; 

(c) either party may with the consent of the other sue for the 
benefit of whom it may concern. 

In 1971, the English Law Reform Committee, in its Report on Conver- 
sion and Detinue 104 also applied its mind to the question of standing, but 
did not limit its recommendations to the sales context. The Committee 
recommended as follows: 105 

. . . not only actual possession (or a right to immediate possession) 
at the material time, but also any other interest in a chattel, whether 
present or future, possessory or proprietary (but not being an equit- 
able interest), should constitute sufficient title to sue and there should 
be no restriction on the right of one co-owner to sue another. 

The Committee's recommendations have now been substantially imple- 

WlBenjamin's Sale of Goods (1974), para. 293; Fleming, The Law of Torts (5th 
ed., 1977), pp. 61-62; Vaines, Personal Property (5th ed., 1973), pp. 23 et seq.; 
Jarvis v. Williams, [1955] 1 W.L.R. 71, [1955] 1 All E.R. 108 (C.A.); and 
compare, Wilson v. Lombank Ltd., [1963] 1 W.L.R. 1294, [1963] 1 All E.R. 
740 (C.A.). 

MlMears v. London and South Western Railway Co. (1862), 11 C.B. (N.S.) 850, 
142 E.R. 1029 (C.P.). 

103NYLRC Study, ch. 5, footnote 52, supra, pp. (713)-(714), citing what was then 
New York Civil Practice Act, s. 210. 

i04ReportNo. 18 (Cmnd. 4774). 

i05 Ibid., para. 128, recommendation 5. 



278 

mented in the Torts (Interference with Goods) Act 1977. 106 However, the 
Act does not appear to give express effect to the Committee's recommenda- 
tion on eligible plaintiffs. 107 In any event, it is not clear whether "risk of 
loss" would have constituted a sufficient "interest in a chattel" for the pur- 
pose of the Committee's recommendation. For its part, section 2-722 of 
the Code also raises a substantial number of constructional difficulties, 108 
and introduces some procedural features that may be new to Ontario. 

We support the principle of UCC 2-722. However, the topic seems 
to extend beyond the scope of this project, and we have not, therefore, 
investigated the full ramifications of the two approaches to the problem, 
nor the merits of a provision restricted to sales as opposed to the merits of 
a comprehensive Act along the U.K. lines. 

(h) RESIDUAL TITLE PROVISION 

As previously noted, locating title at a particular moment in time is 
frequently of importance in non-sales situations. UCC 2-401 addresses 
itself to this residual group of cases, and offers a series of presumptive 
rules that apply unless the parties have "explicitly" provided otherwise. 
Whether they have done so or not, by virtue of UCC 2-401(1), title to 
the goods cannot pass prior to their identification to the contract. Further, 
any retention or reservation by the seller of the title to goods shipped or 
delivered to the buyer is limited in effect to the reservation of a security 
interest. We have previously expressed our support for this aspect of UCC 
2-401 (l), 109 which takes the place of section 20(1) of the Ontario Sale 
of Goods Act. We now recommend that the revised Act should adopt a 
provision comparable to the whole of UCC 2-401 (l). 110 

Subject to the aforementioned conditions, the following rules in UCC 
2-401(2) and (3) apply to determine the locus of title: 

2-401.(2) Unless otherwise explicitly agreed title passes to the 
buyer at the time and place at which the seller completes his per- 
formance with reference to the physical delivery of the goods, despite 
any reservation of a security interest and even though a document of 
title is to be delivered at a different time or place; and in particular 
and despite any reservation of a security interest by the bill of lading 



1061977, c. 32 (U.K.). 

107 Section 7 of the Act allows the claimant to sue for wrongful interference, but 
introduces the concept of unjust enrichment to avoid double liability on the part 
of the tortfeasor. Section 8 allows the tortfeasor to raise the jus tertii to defeat 
the claim of a claimant. Section 8(2) indicates that title and interest in the 
goods are both to be considered by the court. 

I08por example, while risk of loss suffices for standing where goods are "destroyed 
or converted", does "destroyed" include partial destruction, and is it used in 
opposition to "casualty" in section 2-613? Is the relevant time for the existence 
of the plaintiff's interest the time of injury or of action, or both? In National 
Compressor Corp. v. Car row (1969), 6 U.C.C. Rep. 1240 (8th Cir.), at least 
interest at the time of injury was required. Can a buyer or seller sue under 
section 2-722 (c), even though his own interest is negligible? 

WSupra, ch. 4, p. 42. 

uosee, Draft Bill, s. 6.1(2). 



279 

(a) if the contract requires or authorizes the seller to send the 
goods to the buyer but does not require him to deliver 
them at destination, title passes to the buyer at the time and 
place of shipment; but 

(b) if the contract requires delivery at destination, title passes 
on tender there. 

(3) Unless otherwise explicitly agreed where delivery is to be 
made without moving the goods, 

(a) if the seller is to deliver a document of title, title passes at 
the time when and the place where he delivers such docu- 
ments; or 

(b) if the goods are at the time of contracting already identi- 
fied and no documents are to be delivered, title passes at 
the time and place of contracting. 

Subsections (2) (a) and (b) correspond to the provisions in UCC 2-509 
(l)(a) and (b) and do not call for further comment. Subsection (3) (a) 
differs from section 2-509(2) insofar as it draws no distinction between 
negotiable and non-negotiable documents of title. Subsection (3)(b) also 
differs from section 2-509(3) by eliminating the distinction between goods 
in the possession of a merchant and goods in the possession of a non-mer- 
chant seller, where delivery is to be made without moving the goods. The 
rationale of these rules appears to be that title passes to the buyer when 
the seller has discharged whatever delivery responsibilities he has with 
respect to the goods, not whether effective control over them has passed to 
the buyer. 

Given the wide range of circumstances in which the rules may be 
applied, it is not possible to say that they are either "right" or "wrong". 
One can only ask that they be reasonably certain and predictable. With 
one exception, relating to subsection (3)(b), this test seems to be met. 
We discuss this exception below. We now recommend 111 that the revised 
Act should adopt the residual title rules contained in the opening clause of 
subsection (2) of UCC 2-401 and in UCC 2-401(3) (a). We have not 
reproduced clauses (a) and (b) of UCC 2-401(2) because their contents 
appear to be adequately captured in the initial words of the opening clause 
of subsection (2), which provide that "title passes to the buyer at the 
time and place at which the seller completes his performance with refer- 
ence to the physical delivery of the goods . . .". 

The exception to which we refer involves future or unascertained 
goods that are to be delivered without physical movement. UCC 2-401 
(3)(b) only applies to goods identified at the time of the contract, and 
no rule appears to be provided for goods not then identified. This lacuna 
does not appear to have attracted much attention; nor is it referred to in 
the Comments to UCC 2-401. However, at least some decisions 112 appear 

UlSee, Draft Bill, s. 6.1(3). 

"2For example, Tatum v. Richter (1977), 21 U.C.C. Rep. 967 (Md. Ct. App.); 

First National Bank & Trust Co. v. Smithloft (1969), 167 S.E. 2d 190 (Ga. 

Ct. App.). 



280 

to apply the time of identification in both types of case. This may be a 
logical solution, but it is open to the objection that in practice it will be 
difficult to determine when future goods have been identified to the con- 
tract, assuming such identification requires the consent of both parties. 
The solution, therefore, conflicts with the section's overriding objective of 
certainty and predictability. 

There would appear to be two alternatives. The first would be to 
adopt a separate rule for the transfer of title in future or unascertained 
goods. The second solution would involve the adoption of a new rule that 
would avoid the uncertainties of an identification test, and that would 
govern both present and future goods where no physical movement is in- 
volved in their delivery. We favour the second alternative. Accordingly, we 
recommend the substitution in the revised Act of the following test for 
the present test in UCC 2-401 (3) (b) : 113 

... in any other case where delivery is to be made without moving 
the goods, title passes to the buyer on his receipt of the goods. 

The substituted test coincides with the test we have recommended for 
adoption in similar circumstances involving the transfer of risk. 114 We 
recognize that it involves some disadvantages where it is in the buyer's 
interest to argue that title passed to him before he received the goods; for 
example, where the goods have been paid for but not yet collected. The 
same objection, however, could be raised about the other rules in UCC 
2-401. The inescapable fact remains that residual title rules are not func- 
tionally oriented, and can never be all things to all persons. It should be 
recalled that these rules will only apply where the parties have not "other- 
wise explicitly agreed"; that is, the parties may always adopt a rule of their 
choosing. 

RECOMMENDATIONS 

The Commission makes the following recommendations: 

1. The revised Ontario Act should follow the Code's lead in aband- 
oning a "lump" concept of title. The revised Act should adopt an 
issue oriented approach in which the rights, obligations and 
remedies of the seller, buyer, and any third party will, unless the 
Act otherwise provides, be determined without regard to the 
locus of title, and on the basis of readily observable physical facts 
not dependent on the subjective intentions of the parties. 

2. The revised Act should incorporate the rules contained in UCC 
2-501 relating to special property and insurable interest in goods. 

3. The philosophy of UCC 2-509 dealing with passage of risk in 
the absence of breach should be reflected in the revised Ontario 
Act. Risk of loss should pass to the buyer not, as at present, when 
title to the goods is transferred, but, rather, when the goods are 
delivered to the buyer. 



i^See, Draft Bill, s. 6.1(3)2. 
H4See, Draft Bill, s. 7.8(1)3. 



281 

4. Subject to the matters dealt with in recommendations 5-8, infra, 
the revised Act should incorporate a provision similar to UCC 
2-509. 

5. The version of UCC 2-509(1) adopted in the revised Act should 
incorporate the following clarifications and changes: 

(a) the language of subsection (l)(a) should be strengthened 
to make it clear that a "shipment" contract is the normal 
type of contract, and a "destination" contract the variant 
type; 

(b) the word "duly" in the phrases "duly delivered" and "duly 
tendered" in subsections (l)(a) and (b) should be deleted; 
and 

(c) the presumptive rule in UCC 2-509(1) (a) applicable to 
shipment contracts should not apply where the seller is a 
merchant and the buyer is not a merchant. A clause should 
be added providing that, in such cases, risk passes when 
goods are tendered to the buyer at their destination. 

6. The provision in the revised Act comparable to UCC 2-509(2) 
should make it clear that the subsection only applies to goods 
held by a bailee "other than the seller". 

7. The provision in the revised Act comparable to UCC 2-509(3) 
should not distinguish between merchant and non-merchant 
sellers. Rather, in the circumstances in which the subsection ap- 
plies, risk should pass to the buyer on receipt of the goods, 
whether or not the seller is a merchant. 

8. The revised Act should not contain a specific provision dealing 
with the question whether the provision comparable to UCC 
2-509(3) applies where the seller retains possession of the goods 
under an agreement of bailment. 

9. The revised Act should contain a provision, similar to section 
21(b) of the existing Sale of Goods Act, to the effect that the 
provisions on the transfer of risk shall not affect the duties or 
liabilities of the seller or buyer as a bailee of the goods. 

10. Section 32 of the existing Ontario Act, which deals with the 
question of deterioration of goods in the course of transit, should 
be omitted from the revised Act. 

11. A provision comparable to UCC 2-510 dealing with the effect of 
breach on risk of loss, should be incorporated in the revised 
Ontario Act. The revised Act should make it clear that the phrase 
"commercially reasonable time" in subsection (3) refers to the 
period necessary to enable the seller to procure insurance cover- 
age. 

12. The revised Act should include provisions similar to UCC 2-327 
(1 ) (a) and (2) (b) dealing with risk of loss in sales on approval 
and contracts of sale or return. 



282 

13. Subject to recommendation No. 14, infra, provisions comparable 
to the provisions of UCC 2-401(1) and the residual title rules in 
the opening clause of UCC 2-401(2) and in UCC 2-401(3) 
should be adopted in the revised Act. 

14. The residual rule contained in UCC 2-401 (3) (b) involving the 
transfer of title where delivery is to be made without moving the 
goods and without delivery of a document of title should be de- 
leted. It should be replaced by a provision, applicable to both 
present and future goods, to the effect that, where delivery is to be 
made without moving the goods, title passes to the buyer on re- 
ceipt of the goods.